##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)  for the quarterly period ended July 4, 2004 or [  ]     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)
 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
    
    [X]
    
    No
    
    [  ]
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes
    
    [X]
    
    No
    
    [  ]
 As
of August 1, 2004, there were 45,998,177 shares of Common Stock, $.002
par value, of the registrant outstanding.




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INDEX PART I FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Statements of Operations for the three-month and six-month periods ended July 4, 2004 and June 29, 2003Consolidated Balance Sheets at July 4, 2004 and December 31, 2003Consolidated Statement of Stockholders Equity for the six-month period ended July 4, 2004Consolidated Condensed Statements of Cash Flows for the six-month periods ended July 4, 2004 and June 29, 2003Notes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Changes in Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSignaturesEx-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification




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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS COGNEX CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    Six Months EndedJuly 4,
    
    June 29,
    
    July 4,
    
    June 29,2004
    
    2003
    
    2004
    
    2003(unaudited)
    
    (unaudited)RevenueProduct
    
    $
    47,960
    
    
    $
    31,391
    
    
    $
    90,520
    
    
    $
    59,639Service
    
    
    6,507
    
    
    
    5,231
    
    
    
    12,116
    
    
    
    9,87154,467
    
    
    
    36,622
    
    
    
    102,636
    
    
    
    69,510Cost of revenueProduct
    
    
    12,308
    
    
    
    8,995
    
    
    
    23,641
    
    
    
    17,865Service
    
    
    3,597
    
    
    
    3,004
    
    
    
    7,053
    
    
    
    5,85015,905
    
    
    
    11,999
    
    
    
    30,694
    
    
    
    23,715Gross marginProduct
    
    
    35,652
    
    
    
    22,396
    
    
    
    66,879
    
    
    
    41,774Service
    
    
    2,910
    
    
    
    2,227
    
    
    
    5,063
    
    
    
    4,02138,562
    
    
    
    24,623
    
    
    
    71,942
    
    
    
    45,795Research, development, and engineering expenses
    
    
    6,655
    
    
    
    6,263
    
    
    
    13,553
    
    
    
    12,246Selling, general, and administrative expenses
    
    
    17,568
    
    
    
    13,949
    
    
    
    33,882
    
    
    
    27,193Operating income
    
    
    14,339
    
    
    
    4,411
    
    
    
    24,507
    
    
    
    6,356Foreign currency gain (loss)
    
    
    (50
    )
    
    
    (1,164
    )
    
    
    575
    
    
    
    (1,791
    )Investment and other income
    
    
    1,031
    
    
    
    1,615
    
    
    
    2,305
    
    
    
    2,909Income before provision for income taxes
    
    
    15,320
    
    
    
    4,862
    
    
    
    27,387
    
    
    
    7,474Income tax provision
    
    
    4,442
    
    
    
    1,556
    
    
    
    7,942
    
    
    
    2,375Net income
    
    $
    10,878
    
    
    $
    3,306
    
    
    $
    19,445
    
    
    $
    5,099Net income per common and common-equivalent share:Basic
    
    $
    0.24
    
    
    $
    0.08
    
    
    $
    0.43
    
    
    $
    0.12Diluted
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.41
    
    
    $
    0.12Weighted-average common and common-equivalent
shares outstanding:Basic
    
    
    44,881
    
    
    
    42,749
    
    
    
    44,920
    
    
    
    42,736Diluted
    
    
    47,241
    
    
    
    43,678
    
    
    
    47,317
    
    
    
    43,640Cash dividends per common share
    
    $
    0.06
    
    
    $
    
    
    
    $
    0.12
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 1




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COGNEX CORPORATION 
 CONSOLIDATED BALANCE SHEETS
 July 4,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    70,753
    
    
    $
    76,227Short-term investments
    
    
    167,052
    
    
    
    56,406Accounts receivable, less reserves of
$2,704 and $2,613 in 2004 and 2003,
respectively
    
    
    34,204
    
    
    
    26,697Inventories
    
    
    14,817
    
    
    
    15,519Deferred income taxes
    
    
    6,815
    
    
    
    8,223Prepaid expenses and other current assets
    
    
    14,744
    
    
    
    14,526Total current assets
    
    
    308,385
    
    
    
    197,598Long-term investments
    
    
    123,434
    
    
    
    170,869Property, plant, and equipment, net
    
    
    24,117
    
    
    
    24,980Deferred income taxes
    
    
    22,198
    
    
    
    19,428Intangible assets, net
    
    
    7,598
    
    
    
    8,582Goodwill, net
    
    
    6,462
    
    
    
    7,222Other assets
    
    
    3,794
    
    
    
    3,854$
    495,988
    
    
    $
    432,533LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,070
    
    
    $
    5,555Accrued expenses
    
    
    35,113
    
    
    
    32,098Customer deposits
    
    
    2,506
    
    
    
    3,932Deferred revenue
    
    
    6,222
    
    
    
    5,702Total current liabilities
    
    
    48,911
    
    
    
    47,287Other liabilities
    
    
    243
    
    
    
    252Commitments (Notes 2, 6, 7, 8, and 11)Stockholders equity:Common stock, $.002 par value Authorized:
140,000 shares, issued: 45,973 and 48,186 shares in 2004 and 2003,
respectively
    
    
    92
    
    
    
    96Additional paid-in capital
    
    
    186,267
    
    
    
    209,679Treasury
stock, at cost 4,253 shares in 2003
    
    
    
    
    
    
    (72,445
    )Retained earnings
    
    
    272,779
    
    
    
    258,724Accumulated other comprehensive loss
    
    
    (12,304
    )
    
    
    (11,060
    )Total stockholders equity
    
    
    446,834
    
    
    
    384,994$
    495,988
    
    
    $
    432,533
 The accompanying notes are an integral part of these consolidated financial statements. 2




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COGNEX CORPORATION 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 Common Stock
    
    AdditionalPaid-in
    
    Treasury StockShares
    
    Par Value
    
    Capital
    
    Shares
    
    CostBalance at December 31, 2003
    
    
    48,186
    
    
    $
    96
    
    
    $
    209,679
    
    
    
    4,253
    
    
    $
    (72,445
    )Issuance of stock under stock option, stock
purchase, and other plans
    
    
    2,050
    
    
    
    4
    
    
    
    40,841
    
    
    
    10
    
    
    
    (317
    )Retirement
of treasury stock
    
    
    (4,263
    )
    
    
    (8
    )
    
    
    (72,754
    )
    
    
    (4,263
    )
    
    
    72,762Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    8,501Comprehensive income:Net incomePayment of dividendsLosses on foreign intercompany loans,
net of gains on currency swaps, net of
tax of $930Net unrealized loss on
available-for-sale investments, net of
tax of $606Foreign currency translation adjustmentComprehensive incomeBalance at July 4, 2004 (unaudited)
    
    
    45,973
    
    
    $
    92
    
    
    $
    186,267
    
    
    
    
    
    
    $
    
   [Continued from above table, first column(s) repeated] Retained
    
    AccumulatedOtherComprehensive
    
    Comprehensive
    

TotalStockholdersEarnings
    
    Loss
    
    Income
    
    EquityBalance at December 31, 2003
    
    $
    258,724
    
    
    $
    (11,060
    )
    
    
    
    
    
    $
    384,994Issuance of stock under stock option, stock
purchase, and other plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,528Retirement
of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,501Comprehensive income:Net income
    
    
    19,445
    
    
    
    
    
    
    $
    19,445
    
    
    
    19,445Payment of dividends
    
    
    (5,390
    )
    
    
    
    
    
    
    
    
    
    
    (5,390
    )Losses on foreign intercompany loans,
net of gains on currency swaps, net of
tax of $930
    
    
    
    
    
    
    (1,583
    )
    
    
    (1,583
    )
    
    
    (1,583
    )Net unrealized loss on
available-for-sale investments, net of
tax of $606
    
    
    
    
    
    
    (1,032
    )
    
    
    (1,032
    )
    
    
    (1,032
    )Foreign currency translation adjustment
    
    
    
    
    
    
    1,371
    
    
    
    1,371
    
    
    
    1,371Comprehensive income
    
    
    
    
    
    
    
    
    
    $
    18,201Balance at July 4, 2004 (unaudited)
    
    $
    272,779
    
    
    $
    (12,304
    )
    
    
    
    
    
    $
    446,834
 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
 Six Months EndedJuly 4,
    
    June 29,2004
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    19,445
    
    
    $
    5,099Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,019
    
    
    
    5,057Tax benefit from exercise of stock options
    
    
    8,501
    
    
    
    912Deferred income tax (benefit) expense
    
    
    (929
    )
    
    
    233Change in current assets and current liabilities
    
    
    (6,116
    )
    
    
    (1,182
    )Other
    
    
    (78
    )
    
    
    530Net cash provided by operating activities
    
    
    25,842
    
    
    
    10,649Cash flows from investing activities:Purchase of investments
    
    
    (167,575
    )
    
    
    (104,313
    )Maturity and sale of investments
    
    
    100,921
    
    
    
    88,237Purchase of property, plant, and equipment
    
    
    (1,261
    )
    
    
    (1,140
    )Cash paid for business acquisitions
    
    
    
    
    
    
    (7,630
    )Net cash used in investing activities
    
    
    (67,915
    )
    
    
    (24,846
    )Cash flows from financing activities:Payment of dividends
    
    
    (5,390
    )
    
    
    Issuance of stock under stock option, stock
purchase, and other plans
    
    
    40,528
    
    
    
    4,493Net cash provided by financing activities
    
    
    35,138
    
    
    
    4,493Effect of foreign exchange rate changes on cash
    
    
    1,461
    
    
    
    282Net decrease in cash and cash equivalents
    
    
    (5,474
    )
    
    
    (9,422
    )Cash and cash equivalents at beginning of period
    
    
    76,227
    
    
    
    60,864Cash and cash equivalents at end of period
    
    $
    70,753
    
    
    $
    51,442
 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, 2003. 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 July 4, 2004, and the
results of its operations for the three-month and six-month periods ended July
4, 2004 and June 29, 2003, and changes in stockholders equity and cash flows
for the periods presented. The results disclosed in the Consolidated Statements of Operations for the
three-month and six-month periods ended July 4, 2004 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. Effective July 1, 2004,
the Massachusetts Business Corporation Act (the Act)
eliminated the concept of treasury shares. Under the Act, shares
previously classified as treasury shares are to be treated as
authorized but unissued shares of common stock. As a result of this
change, the Company has reclassified treasury shares at July 4, 2004. The shares which
were previously classified as treasury stock are now classified as
authorized, but unissued shares of common stock on the Consolidated
Balance Sheet. 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 (loss) and net income (loss) per share
as reported in these consolidated financial statements and on a pro forma
basis, as if the fair value based method described in Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, had
been adopted, are as follows (in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJuly 4,
    
    June 29,
    
    July 4,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    10,878
    
    
    $
    3,306
    
    
    $
    19,445
    
    
    $
    5,099Less: Total stock-based compensation
costs determined under fair value based
method, net of tax
    
    
    (3,890
    )
    
    
    (3,859
    )
    
    
    (7,591
    )
    
    
    (7,008
    )Net income
(loss), pro forma
    
    $
    6,988
    
    
    $
    (553
    )
    
    $
    11,854
    
    
    $
    (1,909
    )Basic net income per share, as
reported
    
    $
    0.24
    
    
    $
    0.08
    
    
    $
    0.43
    
    
    $
    0.12Basic net income (loss) per share, pro
forma
    
    $
    0.16
    
    
    $
    (0.01
    )
    
    $
    0.26
    
    
    $
    (0.04
    )Diluted net income per share, as
reported
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.41
    
    
    $
    0.12Diluted net income (loss) per share, pro forma
    
    $
    0.16
    
    
    $
    (0.01
    )
    
    $
    0.28
    
    
    $
    (0.04
    )
 5




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: Summary of Significant Accounting Policies (continued) 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 Ended
    
    Six Months EndedJuly 4,
    
    June 29,
    
    July 4,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.6
    %
    
    
    2.0
    %
    
    
    2.8
    %
    
    
    2.0
    %Expected life (in years)
    
    
    3.0
    
    
    
    2.8
    
    
    
    3.1
    
    
    
    2.8Expected volatility
    
    
    42
    %
    
    
    58
    %
    
    
    45
    %
    
    
    58
    %Expected dividend yield
    
    
    .75
    %
    
    
    1.09
    %
    
    
    .75
    %
    
    
    1.09
    %
 NOTE 2: Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consist of the following (in
thousands): July 4,
    
    December 31,2004
    
    2003Cash
    
    $
    60,707
    
    
    $
    49,980Municipal bonds
    
    
    10,046
    
    
    
    26,247Total cash and cash equivalents
    
    
    70,753
    
    
    
    76,227Municipal bonds
    
    
    165,019
    
    
    
    56,406Corporate bonds
    
    
    2,033
    
    
    
    Total short-term investments
    
    
    167,052
    
    
    
    56,406Municipal bonds
    
    
    111,921
    
    
    
    156,511Corporate bonds
    
    
    
    
    
    
    4,212Limited partnership interest
    
    
    11,513
    
    
    
    10,146Total long-term investments
    
    
    123,434
    
    
    
    170,869$
    361,239
    
    
    $
    303,502
 On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock
Associates III, L.P., a venture capital fund. A director of the Company is a
Managing General Partner of Venrock Associates. The Company has committed to a
total investment in the limited partnership of up to $25,000,000, of which
$15,125,000 and $13,625,000 had been contributed as of July 4, 2004 and
December 31, 2003, respectively. The commitment to contribute capital expires
on January 1, 2005, and the Company does not have the right to withdraw from
the partnership prior to December 31, 2010. At July 4, 2004, the carrying value of this investment was $11,513,000 compared
to an estimated fair value, as determined by the General Partner, of
$10,670,000. The unrealized loss of $843,000 was determined to be temporary. 6




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: Inventories Inventories consist of the following (in thousands): July 4,
    
    December 31,2004
    
    2003Raw materials
    
    $
    7,515
    
    
    $
    8,948Work-in-process
    
    
    4,856
    
    
    
    3,514Finished goods
    
    
    2,446
    
    
    
    3,057$
    14,817
    
    
    $
    15,519
 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 during the current year in the
inventory-related reserves that were established in the fourth quarter of 2001
(in thousands): Statement ofBalance Sheet
    
    OperationsAccruedInventories
    
    Expenses
    
    BenefitsReserve balance at December 31, 2003
    
    $
    9,383
    
    
    $
    1,400Inventory sold to customers
    
    
    (383
    )
    
    
    
    
    
    $
    383Inventory sold to brokers
    
    
    (113
    )
    
    
    
    
    
    
    113Write-off and scrap of inventory
    
    
    (233
    )
    
    
    
    
    
    
    Reserve balance at July 4, 2004
    
    $
    8,654
    
    
    $
    1,400Benefits to cost of product revenue recorded in 2004
    
    
    
    
    
    
    
    
    
    $
    496
 A favorable settlement of the remaining purchase commitments may result in a
recovery of a portion of the remaining $1,400,000 accrued at July 4, 2004. 7




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: Intangible Assets Amortized intangible assets consist of the following (in thousands): Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    AmountJuly 4, 2004Customer contracts and relationships
    
    $
    7,617
    
    
    $
    937
    
    
    $
    6,680Complete technology
    
    
    5,365
    
    
    
    4,557
    
    
    
    808Patents
    
    
    109
    
    
    
    27
    
    
    
    82Non-compete agreements
    
    
    48
    
    
    
    20
    
    
    
    28$
    13,139
    
    
    $
    5,541
    
    
    $
    7,598December 31, 2003Customer contracts and relationships
    
    $
    7,832
    
    
    $
    492
    
    
    $
    7,340Complete technology
    
    
    5,388
    
    
    
    4,280
    
    
    
    1,108Patents
    
    
    113
    
    
    
    17
    
    
    
    96Non-compete agreements
    
    
    50
    
    
    
    12
    
    
    
    38$
    13,383
    
    
    $
    4,801
    
    
    $
    8,582
 Aggregate amortization expense for the three-month and six-month periods ended
July 4, 2004 was $377,000 and $760,000, respectively, and $280,000 and $382,000
for the same periods in 2003. Estimated amortization expense for the current fiscal year and succeeding
fiscal years is as follows (in thousands): Year
    
    Amount2004
    
    $
    1,5132005
    
    
    1,2062006
    
    
    1,0882007
    
    
    1,0352008
    
    
    944Thereafter
    
    
    2,572Total
    
    $
    8,358
 8




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: 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 six-month period
ended July 4, 2004 are as follows (in thousands): MVSD
    
    SISD
    
    ConsolidatedBalance at December 31, 2003
    
    $
    4,522
    
    
    $
    2,700
    
    
    $
    7,222Purchase price adjustment (Note 11)
    
    
    (514
    )
    
    
    
    
    
    
    (514
    )Foreign exchange rate changes
    
    
    (158
    )
    
    
    (88
    )
    
    
    (246
    )Balance at July 4, 2004
    
    $
    3,850
    
    
    $
    2,612
    
    
    $
    6,462
 NOTE 6: 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 sold 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, 2003
    
    $
    2,119Provisions for warranties issued during the period
    
    
    772Fulfillment of warranty obligations
    
    
    (744
    )Foreign exchange rate changes
    
    
    (50
    )Balance at July 4, 2004
    
    $
    2,097
 NOTE 7: Indemnification Provisions Except as limited by Massachusetts law, the by-laws of the Company require it
to indemnify certain current or former directors, officers, and employees of
the Company against expenses incurred by them in connection with each
proceeding in which he or she is involved as a result of serving or having
served in certain capacities. Indemnification is not available with respect to
a proceeding as to which it has been adjudicated that the person did not act in
good faith in the reasonable belief that the action was in the best interests
of the Company. The maximum potential amount of future payments the Company
could be required to make under these provisions is unlimited. The Company has
never incurred significant costs related to these indemnification provisions.
As a result, the Company believes the estimated fair value of these provisions
is minimal. The Company accepts standard limited indemnification provisions in the ordinary
course of business, whereby it indemnifies its customers for certain direct
damages incurred in connection with third-party patent or other intellectual
property infringement claims with respect to the use of the Companys products.
The term of these indemnification provisions generally coincides with the
customers use of the Companys products. The maximum potential amount of
future payments the Company could be required to make under these provisions is
always subject to fixed monetary limits. The Company has never incurred
significant costs to defend lawsuits or settle claims related to these
indemnification provisions. As a result, the Company believes the estimated
fair value of these provisions is minimal. 9




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: Indemnification Provisions (continued) 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 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 8: Guarantees On March 25, 2004, the Company provided standby letters of credit totaling
3,146,280,000 Yen (or approximately $29,057,000 based upon the exchange rate at
July 4, 2004) to taxing authorities in Japan. These letters of credit replace
the bank guarantees that the Company provided on May 27, 2003, which were
scheduled to expire in accordance with their terms, and the investments that
collateralize these letters of credit are included in short-term and long-term
investments on the Consolidated Balance Sheets. 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
bank guarantees or standby letters of credit to collateralize 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 $29,057,000 in
taxes, interest and penalties to Japanese taxing authorities. The Company
would then be entitled to recoup the majority of this amount from taxing
authorities in the U.S. 10




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: Net Income Per Share Net income per share is calculated as follows (in thousands, except per share
amounts): Three Months Ended
    
    Six Months EndedJuly 4,
    
    June 29,
    
    July 4,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    10,878
    
    
    $
    3,306
    
    
    $
    19,445
    
    
    $
    5,099Basic:Weighted-average common shares
outstanding
    
    
    44,881
    
    
    
    42,749
    
    
    
    44,920
    
    
    
    42,736Net income per common share
    
    $
    0.24
    
    
    $
    0.08
    
    
    $
    0.43
    
    
    $
    0.12Diluted:Weighted-average common shares
outstanding
    
    
    44,881
    
    
    
    42,749
    
    
    
    44,920
    
    
    
    42,736Effect of dilutive stock options
    
    
    2,360
    
    
    
    929
    
    
    
    2,397
    
    
    
    904Weighted-average common and
common-equivalent shares
outstanding
    
    
    47,241
    
    
    
    43,678
    
    
    
    47,317
    
    
    
    43,640Net income per common and
common-equivalent share
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.41
    
    
    $
    0.12
 Stock options to purchase 736,533 and 728,207 shares of common stock were
outstanding during the three-month and six-months periods ended July 4, 2004,
respectively, and 4,617,831 and 4,612,832 for the same periods in 2003 but were
not included in the calculation of diluted net income per common share because
the options exercise prices were greater than the average market price of the
Companys common stock during those periods. NOTE 10: 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. 11




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: Segment Information (continued) The following table summarizes information about the Companys segments (in
thousands): ReconcilingMVSD
    
    SISD
    
    Items
    
    ConsolidatedThree Months Ended

July 4, 2004Product revenue
    
    $
    41,861
    
    
    $
    6,099
    
    
    $
    
    
    
    $
    47,960Service revenue
    
    
    4,589
    
    
    
    1,918
    
    
    
    
    
    
    
    6,507Operating income
    
    
    15,634
    
    
    
    857
    
    
    
    (2,152
    )
    
    
    14,339Six Months Ended

July 4, 2004Product revenue
    
    $
    80,240
    
    
    $
    10,280
    
    
    $
    
    
    
    $
    90,520Service revenue
    
    
    8,481
    
    
    
    3,635
    
    
    
    
    
    
    
    12,116Operating income
    
    
    27,915
    
    
    
    950
    
    
    
    (4,358
    )
    
    
    24,507Three Months Ended

June 29, 2003Product revenue
    
    $
    25,624
    
    
    $
    5,767
    
    
    $
    
    
    
    $
    31,391Service revenue
    
    
    3,559
    
    
    
    1,672
    
    
    
    
    
    
    
    5,231Operating income
    
    
    4,709
    
    
    
    1,177
    
    
    
    (1,475
    )
    
    
    4,411Six Months Ended

June 29, 2003Product revenue
    
    $
    49,152
    
    
    $
    10,487
    
    
    $
    
    
    
    $
    59,639Service revenue
    
    
    6,660
    
    
    
    3,211
    
    
    
    
    
    
    
    9,871Operating income
    
    
    8,066
    
    
    
    1,691
    
    
    
    (3,401
    )
    
    
    6,356
 Reconciling items consist of unallocated corporate expenses, which primarily
include corporate headquarters costs 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 11: Acquisitions Acquisition of Siemens Dematic AG Wafer Identification Business On March 31, 2003, the Company acquired the wafer identification business of
Siemens Dematic AG, a subsidiary of Siemens AG. Siemens Dematic is a leading
supplier of logistics and factory automation equipment and had been a leading
supplier of wafer identification systems to semiconductor manufacturers in
Europe. Under the terms of the agreement, the Company acquired the rights to
all of Siemens patented and unpatented wafer identification technology, as
well as substantially all of the assets related to its wafer identification
business. This acquisition is intended to enhance the Companys position as a
leading provider of wafer identification systems worldwide. The results of operations
of the acquired business have been included in the Companys consolidated
results of operations since the date of the acquisition. The historical
results of operations of the acquired business were not material compared to
the consolidated results of operations, and therefore, pro forma results are
not presented. 12




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: Acquisitions (continued) The original purchase price consisted of 7,000,000 Euros in cash (or
approximately $7,630,000) paid on March 31, 2003, with the potential for an
additional cash payment in 2005 of up to 1,700,000 Euros (or approximately
$2,068,000) depending upon the achievement of certain performance criteria.
The contingent consideration will be recorded as purchase price when paid and
will be allocated to goodwill. The March 31, 2003 cash payment of 7,000,000
Euros was based upon an estimated balance sheet for the wafer identification
business as of March 31, 2003. After receipt of the final March 31, 2003
balance sheet and resolution of certain items in dispute, Siemens reimbursed
Cognex 796,000 Euros (or $868,000). The final purchase price of 6,204,000 Euros (or approximately $6,762,000) was
allocated as follows: $616,000 to inventories; $274,000 to accounts receivable;
$25,000 to accrued expenses; $4,469,000 to customer contracts and
relationships, to be amortized over eight years; $447,000 to complete
technology, to be amortized over five years; $98,000 to patents, to be
amortized over five years; $44,000 to non-compete agreements, to be amortized
over three years; and $839,000 to goodwill, assigned to the MVSD segment, none
of which is deductible for tax purposes. Acquisition of Gavitec AG Machine Vision Business On December 1, 2003, the Company acquired the machine vision business of
Gavitec AG. Gavitec produces machine vision products for direct part mark
identification (or Industrial ID), which can read markings on the surfaces of
manufactured items to collect data about product components during the
manufacturing process and trace the manufacturing history of the components
during the products lifetime. Under the terms of the agreement, the Company
acquired all of the tangible and intangible assets and assumed certain
liabilities associated with Gavitecs machine vision business. The results of
operations of the acquired business have been included in the Companys
consolidated results of operations since the date of the acquisition. The
historical results of operations of the acquired business were not material
compared to the consolidated results of operations, and therefore, pro forma
results are not presented. The purchase price consisted of 3,800,000 Euros in cash (or approximately
$4,534,000), including 3,500,000 Euros paid at closing, 100,000 Euros to be
paid on December 1, 2004, and 200,000 Euros to be paid on December 1, 2005.
There is the potential for an additional cash payment of up to 250,000 Euros in
both 2004 and 2005 (or approximately $304,000 in each year) depending upon the
achievement of certain performance criteria. The contingent consideration will
be recorded as purchase price when paid and will be allocated to goodwill. NOTE 12: Dividends On April 22, 2004, the Companys Board of Directors declared a cash dividend of
$0.06 per share. The dividend was paid on May 21, 2004 to all stockholders of
record at the close of business on May 7, 2004. NOTE 13: Subsequent Event On July 22, 2004, the Companys Board of Directors declared a cash dividend of
$0.08 per share. The dividend is payable on August 20, 2004 to all
stockholders of record at the close of business on August 6, 2004. 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. 13




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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 for the year ended December 31, 2003.
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 Executive Overview Cognex Corporation (the Company) designs, develops, manufactures, and markets
machine vision systems, or computers that can see, which are used to automate
a wide range of manufacturing processes where vision is required. The
Companys Modular Vision Systems Division (MVSD) specializes in machine vision
systems that are used to automate the manufacture of discrete items, while the
Companys Surface Inspection Systems Division (SISD) specializes in machine
vision systems that are used to inspect the surfaces of materials processed in
a continuous fashion. In addition to product revenue derived from the sale of machine vision systems,
the Company also generates revenue by providing maintenance and support,
education, consulting, and installation services to its customers. The Company
has two primary types of customers: original equipment manufacturers (OEMs) and
end users. OEM customers purchase Cognex machine vision systems and integrate
them into the capital equipment that they manufacture and then sell to their
customers, primarily companies in the semiconductor and electronics industries
that either make computer chips or make printed circuit boards containing
computer chips. End-user customers purchase Cognex machine vision systems and
install them directly on their production lines to automate the manufacture of
a wide range of items in a variety of industries. Over the past few years, the Company has been successful in diversifying its
customer base beyond OEMs serving the semiconductor and electronics industries.
These industries are highly cyclical, with periods of investment followed by
temporary downturns, which have had a severe effect on demand for capital
equipment that incorporates the Companys products. During the first half of
2004, the Company 14




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experienced an increase in demand from capital equipment manufacturers serving
the semiconductor and electronics industries, with sales to these customers
increasing 104% from the same period in 2003. While sales to these capital equipment manufacturers contributed most
significantly to the Companys total revenue growth for the first half of 2004,
sales to all other customers also increased from the prior year by 20% due to
higher demand from end-user customers in a variety of industries, most notably
the electronics industry. While the capital spending trends of the Companys
end-user customers have also been negatively impacted by global economic
conditions, the industries and applications of these customers are far more
diversified than those of its OEM customers. The Companys total revenue during the first half of 2004 increased 48% from
the prior year. During 2004, the Company continued to keep tight control over
expenses and invested only in strategic areas that will help drive revenue
growth, such as sales and marketing. The growth in revenue, along with expense
control, resulted in the Company reporting an operating profit of 24% of
revenue for the first half of 2004 compared to 9% of revenue for the same
period in 2003. Revenue Revenue for the three-month and six-month periods ended July 4, 2004 totaled
$54,467,000 and $102,636,000, respectively, compared to $36,622,000 and
$69,510,000 for the same periods in 2003, representing a 49% increase for the
three-month period and a 48% increase for the six-month period. The majority
of this growth came from sales to capital equipment manufacturers serving the
semiconductor or electronics industries. Sales to these customers for the
three-month and six-month periods ended July 4, 2004 increased $12,563,000, or
109% and $23,860,000, or 104%, respectively. Sales to all other customers
increased $5,282,000, or 21%, for the three-month period and $9,266,000, or
20%, for the six-month period due to higher demand from end-user customers
primarily in the electronics industry. Although sales to these other customers
grew from the prior year, they decreased as a percentage of total revenue to
56% and 54% for the three-month and six-month periods ended July 4, 2004,
respectively, compared to 69% and 67% for the same periods in 2003 due to the
significant increase in sales to capital equipment manufacturers.
Geographically, revenue increased from the prior year in most of the Companys
worldwide regions, but most significantly in Japan, where many of the Companys
customers who are capital equipment manufacturers are located. Product revenue for the three-month and six-month periods ended July 4, 2004
totaled $47,960,000 and $90,520,000, respectively, compared to $31,391,000 and
$59,639,000 for the same periods in 2003, representing a 53% increase for the
three-month period and a 52% increase for the six-month period. The increase
in product revenue was primarily due to a higher 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, totaled $6,507,000 and
$12,116,000 for the three-month and six-month periods ended July 4, 2004,
respectively, compared to $5,231,000 and $9,871,000 for the same periods in
2003, representing a 24% increase for the three-month period and a 23% increase
for the six-month period. Many of the Companys products that were sold during
2003 included bundled maintenance and support programs for which a portion of
the revenue will be recognized in future quarters over the program period. As
a result, service revenue did not increase at the same rate as product revenue,
and it decreased as a percentage of total revenue to 12% for the three-month
and six-month periods ended July 4, 2004 compared to 14% for the same periods
in 2003. MVSD revenue for the three-month and six-month periods ended July 4, 2004
totaled $46,450,000 and $88,721,000, respectively, compared to $29,183,000 and
$55,812,000 for the same periods in 2003, representing a 59% increase for both
periods. The increase in MVSD revenue was primarily due to a higher volume of
systems sold to customers in the semiconductor and electronics industries.
SISD revenue for the three-month and six-month periods ended July 4, 2004
totaled $8,017,000 and $13,915,000, respectively, compared to $7,439,000 and
$13,698,000 for the same periods in 2003, representing a 8% increase for the
three-month period and a 2% increase for the six-month period. The increase in
SISD revenue was due principally to a higher volume of SmartView® system sales.
SISD revenue decreased as a percentage of total revenue to 15% and 14% for the
three-month and six-month periods ended July 4, 2004, respectively, compared to
20% for the same periods in 2003 due to the significant increase in sales to
capital equipment manufacturers at MVSD. 15




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Gross Margin Gross margin as a percentage of revenue was 71% and 70% for the three-month and
six-month periods ended July 4, 2004, respectively, compared to 67% and 66% for
the same periods in 2003. The increase in gross margin was primarily due to
the impact of the higher sales volume, as well as a greater percentage of total
revenue from the sale of modular vision systems, which carry higher margins
than the sale of services and surface inspection systems. Product gross margin as a percentage of revenue was 74% for both the
three-month and six-month periods ended July 4, 2004 compared to 71% and 70%
for the same periods in 2003. The increase in product margin was due primarily
to the increased sales volume, as well as the shift in product mix to
higher-margin modular vision systems. Service gross margin as a percentage of
revenue was 45% and 42% for the three-month and six-month periods ended July 4,
2004, respectively, compared to 43% and 41% for the same periods in 2003. The
increase in service margin was due principally to higher maintenance and
support revenue that is sold bundled with MVSD products. MVSD gross margin as a percentage of revenue was 75% and 74% for the
three-month and six-month periods ended July 4, 2004, respectively, compared to
71% and 70% for the same periods in 2003. The increase in MVSD margin was
primarily due to the higher sales volume of modular vision systems. SISD gross
margin as a percentage of revenue was 46% and 47% for the three-month and
six-month periods ended July 4, 2004, respectively, compared to 51% and 49% for
the same periods in 2003. The decrease in SISD margin was due principally to
higher service costs required to grow the worldwide support organization. Operating Expenses Research, development, and engineering expenses (R,D&E) for the three-month and
six-month periods ended July 4, 2004 were $6,655,000 and $13,553,000,
respectively, compared to $6,263,000 and $12,246,000 for the same periods in
2003, representing a 6% increase for the three-month period and a 11% increase
for the six-month period. MVSD R,D&E expenses for the three-month and
six-month periods ended July 4, 2004 increased 9% and 13%, respectively, from
the same periods in 2003. The increase for the three-month period was
primarily due to the accrual of anticipated company bonuses for 2004. The
increase for the six-month period was principally due to higher
personnel-related costs, including the accrual of anticipated company bonuses
for 2004 and additional engineering personnel resulting from the acquisition of
the machine vision business of Gavitec AG on December 1, 2003. SISD R,D&E
expenses for the three-month and six-month periods ended July 4, 2004 decreased
12% and 7%, respectively, from the same periods in 2003 principally due to
lower spending on software translation services and other activities related to
the SmartView® product line. Selling, general, and administrative (S,G&A) expenses for the three-month and
six-month periods ended July 4, 2004 were $17,568,000 and $33,882,000,
respectively, compared to $13,949,000 and $27,193,000 for the same periods in
2003, representing a 26% increase for the three-month period and a 25% increase
for the six-month period. MVSD S,G&A expenses for the three-month and
six-month periods ended July 4, 2004 increased 25% from the same periods in
2003, while SISD S,G&A expenses increased 18% for the three-month period and
17% for the six-month period. Corporate expenses that are not allocated to a
division increased 46% for the three-month period and 28% for the six-month
period. The increase in MVSD and SISD expenses was primarily due to higher
personnel-related costs, including commissions related to the higher sales
volume, additional end-user sales personnel, and the accrual of anticipated
company bonuses for 2004, as well as the unfavorable impact of foreign exchange
rate changes on the Companys international operations. The increase in
corporate expenses was due principally to the accrual of anticipated company
bonuses for 2004. Foreign Currency Gain (Loss) During the three-month and six-month periods ended July 4, 2004, the Company
recorded foreign currency losses of $50,000 and gains of $575,000,
respectively, compared to losses of $1,164,000 and $1,791,000 for the same
periods in 2003. These gains and losses primarily arose from the revaluation
and settlement of accounts receivable denominated in currencies other than the
subsidiarys functional currency, as well as the revaluation of intercompany
balances that were not fully hedged. 16




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Investment and Other Income Investment and other income for the three-month and six-month periods ended
July 4, 2004 totaled $1,031,000 and $2,305,000, respectively, compared to
$1,615,000 and $2,909,000 for the same periods in 2003. The decrease in
investment and other income was primarily due to lower average interest rates
on the Companys invested balances. Income Taxes The Companys effective tax rate for the three-month and six-month periods
ended July 4, 2004 was 29% compared to 32% for the same periods in 2003. 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 July 4, 2004, the Companys cash, cash equivalent, and investment balances
increased $57,737,000 to $361,239,000 from $303,502,000 at December 31, 2003.
The Companys cash requirements during the six-month period ended July 4, 2004
were met with positive cash flow from operations, as well as the proceeds from
the issuance of common stock under stock option plans that totaled $40,528,000.
Cash requirements consisted of operating activities, capital expenditures, and
the payment of dividends. Capital expenditures during the six-month period
ended July 4, 2004 totaled $1,261,000 and consisted principally of expenditures
for computer hardware and software. On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock
Associates III, L.P., a venture capital fund. The Company has committed to a
total investment in the limited partnership of up to $25,000,000, of which
$14,838,000 had been contributed as of July 4, 2004, including $1,213,000
during the first half of 2004. The commitment to contribute capital expires on
January 1, 2005, and the Company does not have the right to withdraw from the
partnership prior to December 31, 2010. On March 31, 2003, the Company acquired the wafer identification business of
Siemens Dematic AG for a net purchase price of 6,204,000 Euros in cash (or
approximately $6,762,000), with the potential for an additional cash payment in
2005 of up to 1,700,000 Euros (or approximately $2,068,000) depending upon the
achievement of certain performance criteria. On December 1, 2003, the Company acquired the machine vision business of
Gavitec AG for 3,800,000 Euros in cash (or approximately $4,534,000), including
3,500,000 Euros paid at closing, 100,000 Euros to be paid on December 1, 2004,
and 200,000 Euros to be paid on December 1, 2005. There is the potential for
an additional cash payment of up to 250,000 Euros in both 2004 and 2005 (or
approximately $304,000 in each year) depending upon the achievement of certain
performance criteria. 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 April 22, 2004, the Companys Board of Directors declared a cash dividend of
$0.06 per share. The dividend, amounting to $2,714,000, was paid on May 21,
2004 to all stockholders of record at the close of business on May 7, 2004. On
July 22, 2004, the Companys Board of Directors declared a cash dividend of
$0.08 per share payable on August 20, 2004 to all stockholders of record at the
close of business on August 6, 2004. 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 2004, as well as for the
next few years. 17




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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, 2003. 
 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 of the end of the period covered by
this report. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that such disclosure controls and procedures
are effective in ensuring that material information relating to the Company,
including its consolidated subsidiaries, is made known to the certifying
officers by others within the Company and its consolidated subsidiaries during
the period covered by this report. From time to time, the Company reviews the
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 July 4,
2004 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. 18




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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, 2003, as updated
below, which are material to the Company.The bench trial against the Lemelson Partnership began on November
18, 2002 in Las Vegas, Nevada, and ended on January 17, 2003. On
January 23, 2004, the U.S. District Court of Nevada issued a
court order ruling in favor of Cognex and finding that all of the
Lemelson patent claims in suit are unenforcable, invalid, and not
infringed by Cognex. On June 23, 2004, the Partnership filed a
notice of appeal with respect to this decision with the U.S. Court
of Appeals for the Federal Circuit. Cognex cannot predict the
outcome of this appeal.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. CHANGES IN SECURITIES AND USE OF PROCEEDS  None 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES  None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  On April 22, 2004, at a Special Meeting of the Stockholders of
Cognex Corporation held in lieu of the 2004 Annual Meeting, the
Stockholders elected Robert J. Shillman and Anthony Sun to serve as
Directors for a term of three years. Patrick Alias, Jerald
Fishman, William Krivsky, and Reuben Wasserman continued as
Directors after the meeting. The 42,590,442 shares represented at
the meeting voted as follows: The election of Robert J. Shillman
as Director, 41,391,071 votes for and 1,199,371 withheld; the
election of Anthony Sun as Director, 40,279,881 votes for and
2,310,561 withheld. 
 ITEM 5. OTHER INFORMATION  None 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits 31.1  Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of
1934 31.2  Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of
1934 32.1  Certification of Chief Executive Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 19




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32.2  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  (b)
    
    Reports on Form 8-K On April 20, 2004, the Company furnished a Current Report,
dated the same date, on Form 8-K regarding its earnings press
release for the fiscal quarter ended April 4, 2004. 20




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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: August 6, 2004
    
    COGNEX CORPORATION/s/ Robert J. ShillmanRobert J. ShillmanPresident, Chief Executive Officer, and Chairman of the Board of
Directors (duly authorized officer, principal executive officer)/s/ Richard A. MorinRichard A. MorinSenior Vice President of Finance, Chief
Financial Officer, and Treasurer (duly authorized officer,
principal financial and accounting officer)
 21