##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 for the quarterly period ended October 1, 2006 or
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
 for the transition period from  to
 Commission File Number 0-17869
 COGNEX CORPORATION
 (Exact name of registrant as specified in its charter)
 Massachusetts
    
    
    
    04-2713778(State or other jurisdiction of
    
    
    
    (I.R.S. Employerincorporation or organization)
    
    
    
    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)
  þ o
  þ o o
  o þ




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##### 



INDEX
 PART I
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements
    
    
    1Consolidated Statements of Operations for the three-month and
nine-month periods ended October 1, 2006 and October 2, 2005
    
    
    1Consolidated Balance Sheets at October 1, 2006 and December 31, 2005
    
    
    2Consolidated Statement of Shareholders Equity for the nine-month
period ended October 1, 2006
    
    
    3Consolidated Condensed Statements of Cash Flows for the nine-month
periods ended October 1, 2006 and October 2, 2005
    
    
    4Notes to Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    23PART II
    
    OTHER INFORMATION
    
    
    24Item 1.
    
    Legal Proceedings
    
    
    24Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3.
    
    Defaults Upon Senior Securities
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits
    
    
    25Signatures
    
    
    26Ex-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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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 ITEM 1: FINANCIAL STATEMENTS
 COGNEX CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)
    
    
    (unaudited)RevenueProduct
    
    $
    52,249
    
    
    $
    52,634
    
    
    $
    163,250
    
    
    $
    138,688Service
    
    
    5,756
    
    
    
    5,622
    
    
    
    16,869
    
    
    
    17,36958,005
    
    
    
    58,256
    
    
    
    180,119
    
    
    
    156,057Cost of revenueProduct (1)
    
    
    12,031
    
    
    
    11,890
    
    
    
    38,055
    
    
    
    34,776Service (1)
    
    
    3,416
    
    
    
    3,865
    
    
    
    10,695
    
    
    
    10,83415,447
    
    
    
    15,755
    
    
    
    48,750
    
    
    
    45,610Gross marginProduct
    
    
    40,218
    
    
    
    40,744
    
    
    
    125,195
    
    
    
    103,912Service
    
    
    2,340
    
    
    
    1,757
    
    
    
    6,174
    
    
    
    6,53542,558
    
    
    
    42,501
    
    
    
    131,369
    
    
    
    110,447Research, development, and engineering expenses (1)
    
    
    7,997
    
    
    
    7,224
    
    
    
    24,496
    
    
    
    20,724Selling, general, and administrative expenses (1)
    
    
    23,414
    
    
    
    21,351
    
    
    
    72,470
    
    
    
    60,353Operating income
    
    
    11,147
    
    
    
    13,926
    
    
    
    34,403
    
    
    
    29,370Foreign currency loss
    
    
    (282
    )
    
    
    (410
    )
    
    
    (707
    )
    
    
    (602
    )Investment and other income
    
    
    1,518
    
    
    
    1,156
    
    
    
    4,856
    
    
    
    3,599Income before provision for income taxes
    
    
    12,383
    
    
    
    14,672
    
    
    
    38,552
    
    
    
    32,367Income tax provision
    
    
    2,267
    
    
    
    3,814
    
    
    
    8,202
    
    
    
    8,415Net income
    
    $
    10,116
    
    
    $
    10,858
    
    
    $
    30,350
    
    
    $
    23,952Net income per common and common-equivalent share:Basic
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.66
    
    
    $
    0.51Diluted
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.64
    
    
    $
    0.50Weighted-average common and common-equivalent
shares outstanding:Basic
    
    
    44,825
    
    
    
    46,931
    
    
    
    45,905
    
    
    
    46,536Diluted
    
    
    45,682
    
    
    
    48,469
    
    
    
    47,086
    
    
    
    47,703Cash dividends per common share
    
    $
    0.085
    
    
    $
    0.08
    
    
    $
    0.245
    
    
    $
    0.24
 
 (1)
    
    Amounts include stock-based compensation
expense, as follows: Product cost of revenue
    
    $
    191
    
    
    $
    
    
    
    $
    544
    
    
    $
    Service cost of revenue
    
    
    222
    
    
    
    
    
    
    
    650
    
    
    
    Research, development, and engineering
    
    
    941
    
    
    
    
    
    
    
    2,671
    
    
    
    Selling, general, and administrative
    
    
    2,121
    
    
    
    
    
    
    
    6,071
    
    
    
    Total stock-based compensation expense
    
    $
    3,475
    
    
    $
    
    
    
    $
    9,936
    
    
    $
    
  1




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##### Table of Contents



COGNEX CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
  October 1,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    89,550
    
    
    $
    72,856Short-term investments
    
    
    120,638
    
    
    
    169,156Accounts receivable, less reserves of
$2,451 and $2,370 in 2006 and 2005,
respectively
    
    
    39,893
    
    
    
    42,051Inventories, net
    
    
    28,195
    
    
    
    18,819Deferred income taxes
    
    
    7,646
    
    
    
    7,667Prepaid expenses and other current assets
    
    
    13,969
    
    
    
    16,104Total current assets
    
    
    299,891
    
    
    
    326,653Long-term investments
    
    
    56,773
    
    
    
    70,246Property, plant, and equipment, net
    
    
    24,335
    
    
    
    24,175Deferred income taxes
    
    
    15,809
    
    
    
    10,227Intangible assets, net
    
    
    46,300
    
    
    
    50,049Goodwill
    
    
    82,976
    
    
    
    79,807Other assets
    
    
    3,399
    
    
    
    3,405$
    529,483
    
    
    $
    564,562LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,989
    
    
    $
    7,118Accrued expenses
    
    
    49,477
    
    
    
    43,476Customer deposits
    
    
    1,655
    
    
    
    2,142Deferred revenue
    
    
    6,178
    
    
    
    5,305Total current liabilities
    
    
    63,299
    
    
    
    58,041Commitments (Notes 3, 7, 8, 9, and 13)Shareholders equity:Common
stock, $.002 par value  Authorized:
140,000 shares, issued: 44,535 and 47,171 shares in 2006
and 2005, respectively
    
    
    89
    
    
    
    94Additional paid-in capital
    
    
    155,075
    
    
    
    216,031Retained earnings
    
    
    323,537
    
    
    
    304,454Accumulated other comprehensive loss
    
    
    (12,517
    )
    
    
    (14,058
    )Total shareholders equity
    
    
    466,184
    
    
    
    506,521$
    529,483
    
    
    $
    564,562
  2




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##### Table of Contents



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, 2005
    
    
    47,171
    
    
    $
    94
    
    
    $
    216,031
    
    
    $
    304,454
    
    
    $
    (14,058
    )
    
    
    
    
    
    $
    506,521Issuance of stock under stock option, stock
purchase, and other plans
    
    
    442
    
    
    
    1
    
    
    
    9,197
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,198Stock-based compensation expenses
    
    
    
    
    
    
    
    
    
    
    9,936
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,936Excess tax benefit from stock option
exercises
    
    
    
    
    
    
    
    
    
    
    1,201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,201Payment of dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,267
    )
    
    
    
    
    
    
    
    
    
    
    (11,267
    )Repurchase of Common Stock
    
    
    (3,078
    )
    
    
    (6
    )
    
    
    (81,290
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (81,296
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,350
    
    
    
    
    
    
    $
    30,350
    
    
    
    30,350Gains on long-term intercompany loans,
net of losses on currency swaps, net of
tax of $98
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166
    
    
    
    166
    
    
    
    166Net unrealized gain on available-for-sale
investments, net of tax of $282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    480
    
    
    
    480
    
    
    
    480Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    895
    
    
    
    895
    
    
    
    895Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    31,891Balance at October 1, 2006 (unaudited)
    
    
    44,535
    
    
    $
    89
    
    
    $
    155,075
    
    
    $
    323,537
    
    
    $
    (12,517
    )
    
    
    
    
    
    $
    466,184
  3




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##### Table of Contents



COGNEX CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
  Nine Months EndedOctober 1,
    
    
    October 2,2006
    
    
    2005(unaudited)Cash flows from operating activities:Net income
    
    $
    30,350
    
    
    $
    23,952Adjustments to reconcile net income to net cash provided
by operating activities:Stock-based compensation expense
    
    
    9,936
    
    
    
    Depreciation and amortization
    
    
    8,702
    
    
    
    8,739Excess tax benefit from stock option exercises
    
    
    995
    
    
    
    4,236Deferred income tax benefit
    
    
    (5,822
    )
    
    
    (469
    )Change in current assets and current liabilities
    
    
    (1,676
    )
    
    
    (6,099
    )Other
    
    
    48
    
    
    
    309Net cash provided by operating activities
    
    
    42,533
    
    
    
    30,668Cash flows from investing activities:Purchase of investments
    
    
    (351,528
    )
    
    
    (618,271
    )Maturity and sale of investments
    
    
    413,210
    
    
    
    731,967Purchase of property, plant, and equipment
    
    
    (3,231
    )
    
    
    (2,909
    )Cash paid for business acquisitions, net of cash acquired
    
    
    (3,188
    )
    
    
    (111,591
    )Net cash provided by (used in) investing activities
    
    
    55,263
    
    
    
    (804
    )Cash flows from financing activities:Payment of dividends
    
    
    (11,267
    )
    
    
    (11,173
    )Repurchase of common stock
    
    
    (81,296
    )
    
    
    Issuance of stock under stock option plans
    
    
    9,198
    
    
    
    21,248Excess tax benefit from stock option exercises
    
    
    103
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (83,262
    )
    
    
    10,075Effect of foreign exchange rate changes on cash
    
    
    2,160
    
    
    
    (2,184
    )Net increase in cash and cash equivalents
    
    
    16,694
    
    
    
    37,755Cash and cash equivalents at beginning of period
    
    
    72,856
    
    
    
    54,270Cash and cash equivalents at end of period
    
    $
    89,550
    
    
    $
    92,025
  4




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##### Table of Contents



COGNEX CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1: Summary of Significant Accounting Policies
    NOTE 2: New Pronouncements
  NOTE 3: Cash, Cash Equivalents, and Investments
  October 1,
    
    
    December 31,2006
    
    
    2005Cash
    
    $
    79,900
    
    
    $
    72,856Cash equivalents
    
    
    9,650
    
    
    
    Total cash and cash
equivalents
    
    
    89,550
    
    
    
    72,856Municipal bonds
    
    
    104,263
    
    
    
    140,718Commercial paper
    
    
    9,875
    
    
    
    24,584Agency notes
    
    
    4,000
    
    
    
    Corporate bonds
    
    
    2,500
    
    
    
    2,500Treasury bills
    
    
    
    
    
    
    1,354Total short-term
investments
    
    
    120,638
    
    
    
    169,156Municipal bonds
    
    
    45,827
    
    
    
    59,863Limited partnership
interest
    
    
    10,946
    
    
    
    10,383Total long-term
investments
    
    
    56,773
    
    
    
    70,246$
    266,961
    
    
    $
    312,258
 5




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 3: Cash, Cash Equivalents, and Investments (continued)
   NOTE 4: Inventories
  October 1,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    14,940
    
    
    $
    8,958Work-in-process
    
    
    2,352
    
    
    
    3,406Finished goods
    
    
    10,903
    
    
    
    6,455$
    28,195
    
    
    $
    18,819
   Balance Sheet
    
    
    Statement ofAccrued
    
    
    OperationsInventories
    
    
    Expenses
    
    
    BenefitsReserve balance at December 31, 2005
    
    $
    5,884
    
    
    $
    1,400Benefits to cost of product revenue
recorded in the nine-month period
ended October 2, 2005
    
    
    
    
    
    
    
    
    
    $
    472Inventory sold to customers
    
    
    (902
    )
    
    
    
    
    
    $
    902Inventory sold to brokers
    
    
    (352
    )
    
    
    
    
    
    
    Write-off and scrap of inventory
    
    
    (118
    )
    
    
    
    
    
    
    Reserve balance at October 1, 2006
    
    $
    4,512
    
    
    $
    1,400Benefits to cost of product revenue
recorded in the nine-month period
ended October 1, 2006
    
    
    
    
    
    
    
    
    
    $
    902
 6




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4: Inventories (continued)
  NOTE 5: Intangible Assets
  Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    AmountOctober 1, 2006Distribution networks
    
    $
    38,060
    
    
    $
    4,655
    
    
    $
    33,405Customer contracts and relationships
    
    
    12,725
    
    
    
    3,659
    
    
    
    9,066Completed technologies
    
    
    6,803
    
    
    
    3,831
    
    
    
    2,972Other
    
    
    1,365
    
    
    
    508
    
    
    
    857$
    58,953
    
    
    $
    12,653
    
    
    $
    46,300
 Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    AmountDecember 31, 2005Distribution networks
    
    $
    38,060
    
    
    $
    2,191
    
    
    $
    35,869Customer contracts and relationships
    
    
    12,186
    
    
    
    2,520
    
    
    
    9,666Completed technologies
    
    
    9,028
    
    
    
    5,491
    
    
    
    3,537Other
    
    
    1,264
    
    
    
    287
    
    
    
    977$
    60,538
    
    
    $
    10,489
    
    
    $
    50,049
   Year
    
    Amount2006
    
    
    1,4932007
    
    
    5,5882008
    
    
    5,5882009
    
    
    5,4002010
    
    
    5,271Thereafter
    
    
    22,960Total
    
    $
    46,300
 7




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6: Goodwill
   MVSD
    
    
    SISD
    
    
    ConsolidatedBalance at December 31, 2005
    
    $
    77,266
    
    
    $
    2,541
    
    
    $
    79,807Assistware business acquisition (Note 13)
    
    
    2,962
    
    
    
    
    
    
    
    2,962Siemens contingent payment (Note 13)
    
    
    190
    
    
    
    
    
    
    
    190DVT purchase price adjustment (Note 13)
    
    
    (298
    )
    
    
    
    
    
    
    (298
    )Foreign exchange rate changes
    
    
    135
    
    
    
    180
    
    
    
    315Balance at October 1, 2006
    
    $
    80,255
    
    
    $
    2,721
    
    
    $
    82,976
  NOTE 7: Warranty Obligations
   Balance at December 31, 2005
    
    $
    1,447Provisions for warranties issued during the period
    
    
    725Fulfillment of warranty obligations
    
    
    (831
    )Foreign exchange rate changes
    
    
    64Balance at October 1, 2006
    
    $
    1,405
 NOTE 8: Indemnification Provisions
  8




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8: Indemnification Provisions (continued)
   NOTE 9: Income Taxes and Standby Letters of Credit
    NOTE 10: Stock-Based Compensation Expense
  9




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10: Stock-Based Compensation Expense (continued)
   st st
   Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December 31, 2005
    
    
    10,675
    
    
    $
    25.36Granted
    
    
    1,657
    
    
    
    28.78Exercised
    
    
    (437
    )
    
    
    20.67Forfeited or Expired
    
    
    (432
    )
    
    
    29.15Outstanding at October 1, 2006
    
    
    11,463
    
    
    $
    25.89
    
    
    
    6.75
    
    
    $
    24,769Exercisable at October 1, 2006
    
    
    6,943
    
    
    $
    25.34
    
    
    
    5.52
    
    
    $
    21,383
   10




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10: Stock-Based Compensation Expense (continued)
  Three Months Ended
    
    Nine Months EndedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005Risk-free
rate
    
    
    4.9
    %
    
    
    4.0
    %
    
    
    4.6
    %
    
    
    3.4
    %Expected dividend yield
    
    
    1.25
    %
    
    
    1.08
    %
    
    
    1.11
    %
    
    
    1.27
    %Expected volatility
    
    
    46
    %
    
    
    35
    %
    
    
    45
    %
    
    
    35
    %Expected term (in years)
    
    
    5.0
    
    
    
    2.9
    
    
    
    4.1
    
    
    
    2.8
 Risk-free rate
  Expected dividend yield
  Expected volatility
  Expected term
    11




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 10: Stock-Based Compensation Expense (continued)
    Three Months
    
    
    Nine MonthsEnded
    
    
    EndedOctober 2,
    
    
    October 2,2005
    
    
    2005Net income, as reported
    
    $
    10,858
    
    
    $
    23,952Less: Total stock-based compensation expense
determined under fair value based method, net
of tax
    
    
    (2,360
    )
    
    
    (7,040
    )Net income, pro forma
    
    
    8,498
    
    
    
    16,912Basic net income per share, as reported
    
    $
    0.23
    
    
    $
    0.51Basic net income per share, pro forma
    
    $
    0.18
    
    
    $
    0.36Diluted net income per share, as reported
    
    $
    0.22
    
    
    $
    0.50Diluted net income per share, pro forma
    
    $
    0.18
    
    
    $
    0.35
 12




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 11: Net Income Per Share
  Three Months Ended
    
    
    Nine Months EndedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    10,116
    
    
    $
    10,858
    
    
    $
    30,350
    
    
    $
    23,952Basic:Weighted-average common shares
outstanding
    
    
    44,825
    
    
    
    46,931
    
    
    
    45,905
    
    
    
    46,536Net income per common share
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.66
    
    
    $
    $0.51Diluted:Weighted-average common shares
outstanding
    
    
    44,825
    
    
    
    46,931
    
    
    
    45,905
    
    
    
    46,536Effect of dilutive stock options
    
    
    857
    
    
    
    1,538
    
    
    
    1,181
    
    
    
    1,167Weighted-average common and
common-equivalent shares
outstanding
    
    
    45,682
    
    
    
    48,469
    
    
    
    47,086
    
    
    
    47,703Net income per common and
common-equivalent share
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.64
    
    
    $
    0.50
  NOTE 12: Segment Information
  13




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12: Segment Information (continued)
  ReconcilingMVSD
    
    SISD
    
    Items
    
    ConsolidatedThree Months Ended
October 1, 2006Product revenue
    
    $
    48,216
    
    
    $
    4,033
    
    
    $
    
    
    
    $
    52,249Service revenue
    
    
    3,087
    
    
    
    2,669
    
    
    
    
    
    
    
    5,756Operating income
    
    
    16,151
    
    
    
    720
    
    
    
    (5,724
    )
    
    
    11,147Nine Months Ended
October 1, 2006Product revenue
    
    $
    148,564
    
    
    $
    14,686
    
    
    $
    
    
    
    $
    163,250Service revenue
    
    
    9,300
    
    
    
    7,569
    
    
    
    
    
    
    
    16,869Operating income
    
    
    50,043
    
    
    
    2,531
    
    
    
    (18,171
    )
    
    
    34,403
 ReconcilingMVSD
    
    SISD
    
    Items
    
    ConsolidatedThree Months Ended
October 2, 2005Product revenue
    
    $
    45,770
    
    
    $
    6,864
    
    
    $
    
    
    
    $
    52,634Service revenue
    
    
    3,033
    
    
    
    2,589
    
    
    
    
    
    
    
    5,622Operating income
    
    
    14,124
    
    
    
    1,902
    
    
    
    (2,100
    )
    
    
    13,926Nine Months Ended
October 2, 2005Product revenue
    
    $
    120,363
    
    
    $
    18,325
    
    
    $
    
    
    
    $
    138,688Service revenue
    
    
    10,063
    
    
    
    7,306
    
    
    
    
    
    
    
    17,369Operating income
    
    
    31,565
    
    
    
    4,015
    
    
    
    (6,210
    )
    
    
    29,370
 th
 NOTE 13: Acquisitions
 Assistware Technology
  14




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13: Acquisitions (continued)
   Weighted-AverageEstimated Fair
    
    
    Amortization PeriodValue
    
    
    (in years)Accounts receivable
    
    $
    58Inventories
    
    
    29Prepaid expenses and other current assets
    
    
    320Property, plant, and equipment
    
    
    32Intangible assetsCustomer contract
    
    
    140
    
    
    
    3.5Customer relationships
    
    
    100
    
    
    
    9Completed technologies
    
    
    100
    
    
    
    5Goodwill
    
    
    2,962Total assets acquired
    
    
    3,741Accounts payable
    
    
    280Accrued expenses
    
    
    463Total liabilities assumed
    
    
    743Total purchase price
    
    $
    2,998
  DVT Corporation
  15




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13: Acquisitions (continued)
  Weighted-AverageEstimated Fair
    
    
    Amortization PeriodValue
    
    
    (in years)Accounts receivable
    
    $
    5,785Inventories
    
    
    1,995Prepaid expenses and other current assets
    
    
    5,531Property, plant, and equipment
    
    
    766Other assets
    
    
    66Intangible assetsDistribution networks
    
    
    38,060
    
    
    
    11.6Customer relationships
    
    
    4,740
    
    
    
    12Completed technologies
    
    
    3,680
    
    
    
    6Trade names, trademarks, and
non-competition agreement
    
    
    1,110
    
    
    
    4Goodwill
    
    
    73,180Total assets acquired
    
    
    134,913Accounts payable
    
    
    1,388Accrued expenses
    
    
    6,102Net deferred tax liabilities
    
    
    15,816Total liabilities assumed
    
    
    23,306Total purchase price
    
    $
    111,607
 Siemens Dematic AG Wafer Identification Business
  16




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##### Table of Contents



NOTE 14: Dividends
  NOTE 15: Subsequent Events
  
 ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  17




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##### Table of Contents



Executive Overview
     Stock-Based Compensation Expense
  18
    Table of Contents  Results of Operations
 Revenue
  19
    Table of Contents  Gross Margin
    Operating Expenses
 20
    Table of Contents  th
 Nonoperating Income
  21
    Table of Contents  Income Taxes
   Liquidity and Capital Resources
      22
    Table of Contents  New Pronouncements
  
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4: CONTROLS AND PROCEDURES
  23
    Table of Contents  PART II: OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGSOn March 13, 2006, the Company filed a Declaratory Judgment action in the
United States District Court for Minnesota seeking that certain patents being
asserted by Acacia Research Corporation and Veritec, Inc., and their respective
subsidiaries, be ruled invalid, unenforceable and/or not infringed by Cognex
Corporation. The patent assertions relate to two-dimensional symbology reading; in
particular, the defendants have alleged that any company reading a data matrix code
infringe the subject patents. While the defendants have not asserted the patents
against Cognex Corporation, they have filed litigation against several companies asserting
infringement, including certain Cognex Corporation customers, demanding that these parties enter
into a license arrangement with the defendants to operate under the patents. In
addition to the potential threat of litigation, the Company has certain indemnity obligations
relating to its contracts with these customers, which led to the Companys decision
to take this action. The litigation is in its early stages and discovery will begin
shortly. Cognex Corporation cannot predict the outcome of this
matter, and although the Company believes it has a meritorious case, an adverse resolution of this lawsuit could have a
material adverse effect on the Companys financial position, results
of operations, and/or
indemnification obligations.Various other claims and legal proceedings generally incidental to the normal course
of business are pending or threatened on behalf of or against Cognex
Corporation. While the Company cannot
predict the outcome of these matters, in the opinion of management, any liability
arising from
them will not have a material adverse effect on the Companys
financial position, liquidity,
or results of operations after giving effect to provisions already recorded.
 24
    Table of Contents  ITEM 1A.
    
    RISK FACTORSFor factors that could affect the Companys business, results of operations,
and financial condition, see the risk factors discussion provided in Item 1A of the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2005.
 
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSThe following table sets forth information with respect to purchases by the
Company of shares of its Common Stock during the periods indicated.
 Total
    
    
    ApproximateNumber of
    
    
    Dollar ValueShares
    
    
    of SharesPurchased
    
    
    that Mayas Part of
    
    
    Yet BeTotal
    
    
    Average
    
    
    Publicly
    
    
    PurchasedNumber of
    
    
    Price
    
    
    Announced
    
    
    Under theShares
    
    
    Paid per
    
    
    Plans or
    
    
    Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    Programs
    
    
    ProgramsJuly 3  August 2,
2006
    
    
    64,879
    
    
    $
    23.29
    
    
    
    64,879
    
    
    
    August 3 
September 2, 2006
    
    
    752,529
    
    
    $
    23.79
    
    
    
    752,529
    
    
    
    September 3 
October 1, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    817,408
    
    
    $
    23.75
    
    
    
    817,408
    
    
    $
    80,587,000
 (1)
    
    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 the quarter ended July 2, 2006, this repurchase program was completed.
On July 27, 2006, the Companys Board of Directors authorized a new program for
the repurchase of up to $100,000,000 of the Companys Common Stock, of which
817,408 shares were repurchased at a cost of $19,413,000.
 
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIESNone
 
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone
 
 ITEM 5.
    
    OTHER INFORMATIONNone
 
 ITEM 6.
    
    EXHIBITS
     
 *
    
    Filed herewith**
    
    Furnished herewith 25
    Table of Contents  SIGNATURES
  DATE: November 3, 2006
    
    COGNEX CORPORATION/s/ Robert J. ShillmanRobert J. ShillmanChairman of the Board of Directors and Chief Executive Officer(duly authorized officer, principal executive officer)/s/ Richard A. MorinRichard A. MorinSenior Vice President of Finance and Administration, ChiefFinancial Officer, and Treasurer(duly authorized officer, principal financial and accounting officer)
 26