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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)  [   ] 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
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 One Vision Drive
Natick, Massachusetts 01760-2059
(508) 650-3000 
 (Address, including zip code, and telephone number,
including area code, of principal executive offices)
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [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 May 2, 2004, there were 45,220,758 shares of Common Stock, $.002 par
value, of the registrant outstanding.




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INDEX PART I
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements
    
    
    1Consolidated Statements of Operations for the three-month periods ended April 4, 2004 and March 30, 2003
    
    
    1Consolidated Balance Sheets at April 4, 2004 and December 31, 2003
    
    
    2Consolidated
Statement of Stockholders Equity for the three-month period ended April 4, 2004
    
    
    3Consolidated Condensed Statements of Cash Flows for the three-month periods ended April 4, 2004 and March 30, 2003
    
    
    4Notes to Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17PART II
    
    OTHER INFORMATION
    
    
    18Item 1.
    
    Legal Proceedings
    
    
    18Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    18Item 3.
    
    Defaults Upon Senior Securities
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    18Signatures
    
    
    19Ex-31.1 CEO CertificationEx-31.2 CFO CertificationEx-32.1 CEO Certification pursuant to Sec. 906Ex-32.2 CFO Certification pursuant to Sec. 906




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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS COGNEX CORPORATION 
 CONSOLIDATED STATEMENTS OF OPERATIONS  Three Months EndedApril 4,
    
    March 30,2004
    
    2003(unaudited)RevenueProduct
    
    $
    42,560
    
    
    $
    28,248Service
    
    
    5,609
    
    
    
    4,64048,169
    
    
    
    32,888Cost of revenueProduct
    
    
    11,333
    
    
    
    8,870Service
    
    
    3,456
    
    
    
    2,84614,789
    
    
    
    11,716Gross marginProduct
    
    
    31,227
    
    
    
    19,378Service
    
    
    2,153
    
    
    
    1,79433,380
    
    
    
    21,172Research, development, and engineering expenses
    
    
    6,898
    
    
    
    5,983Selling, general, and administrative expenses
    
    
    16,314
    
    
    
    13,244Operating income
    
    
    10,168
    
    
    
    1,945Foreign currency gain (loss)
    
    
    625
    
    
    
    (627
    )Investment and other income
    
    
    1,274
    
    
    
    1,294Income before provision for income taxes
    
    
    12,067
    
    
    
    2,612Income tax provision
    
    
    3,500
    
    
    
    819Net income
    
    $
    8,567
    
    
    $
    1,793Net income per common and common-equivalent share:Basic
    
    $
    0.19
    
    
    $
    0.04Diluted
    
    $
    0.18
    
    
    $
    0.04Weighted-average common and common-equivalent shares outstanding:Basic
    
    
    44,512
    
    
    
    42,666Diluted
    
    
    46,752
    
    
    
    43,557Cash dividends per common share
    
    $
    0.06
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 1




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COGNEX CORPORATION 
 CONSOLIDATED BALANCE SHEETS  April 4,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    105,982
    
    
    $
    76,227Short-term investments
    
    
    80,752
    
    
    
    56,406Accounts receivable, less reserves of
$2,615 and $2,613 in 2004 and 2003,
respectively
    
    
    26,456
    
    
    
    26,697Inventories
    
    
    14,221
    
    
    
    15,519Deferred income taxes
    
    
    8,479
    
    
    
    8,223Prepaid expenses and other current assets
    
    
    17,758
    
    
    
    14,526Total current assets
    
    
    253,648
    
    
    
    197,598Long-term investments
    
    
    147,925
    
    
    
    170,869Property, plant, and equipment, net
    
    
    24,500
    
    
    
    24,980Deferred income taxes
    
    
    19,374
    
    
    
    19,428Intangible assets, net
    
    
    7,960
    
    
    
    8,582Goodwill, net
    
    
    6,447
    
    
    
    7,222Other assets
    
    
    3,867
    
    
    
    3,854$
    463,721
    
    
    $
    432,533LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,538
    
    
    $
    5,555Accrued expenses
    
    
    32,750
    
    
    
    32,098Customer deposits
    
    
    2,641
    
    
    
    3,932Deferred revenue
    
    
    6,028
    
    
    
    5,702Total current liabilities
    
    
    46,957
    
    
    
    47,287Other liabilities
    
    
    243
    
    
    
    252Commitments (Notes 3, 7, 8, and 9)Stockholders equity:Common stock, $.002 par value Authorized: 140,000 shares, issued: 49,239 and 48,186 shares in
2004 and 2003, respectively
    
    
    98
    
    
    
    96Additional paid-in capital
    
    
    234,353
    
    
    
    209,679Treasury stock, at cost, 4,263 and 4,253 shares in 2004 and 2003,
respectively
    
    
    (72,765
    )
    
    
    (72,445
    )Retained earnings
    
    
    264,615
    
    
    
    258,724Accumulated other comprehensive loss
    
    
    (9,780
    )
    
    
    (11,060
    )Total stockholders equity
    
    
    416,521
    
    
    
    384,994$
    463,721
    
    
    $
    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
    
    
    1,053
    
    
    
    2
    
    
    
    20,725
    
    
    
    10
    
    
    
    (320
    )Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    3,949Comprehensive income:Net incomePayment of dividendsLosses on foreign intercompany loans,
net of gains on currency swaps,
net of tax of $434Net unrealized gain on available-for-sale
investments, net of tax of $106Foreign currency translation adjustmentComprehensive incomeBalance at April 4, 2004 (unaudited)
    
    
    49,239
    
    
    $
    98
    
    
    $
    234,353
    
    
    
    4,263
    
    
    $
    (72,765
    )
   [Continued from above table, first column(s) repeated] AccumulatedOther
    
    
    
    
    
    TotalRetained
    
    Comprehensive
    
    Comprehensive
    
    StockholdersEarnings
    
    Loss
    
    Income
    
    EquityBalance at December 31, 2003
    
    $
    258,724
    
    
    $
    (11,060
    )
    
    
    
    
    
    $
    384,994Issuance of stock under stock option, stock
purchase, and other plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,407Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,949Comprehensive income:Net income
    
    
    8,567
    
    
    
    
    
    
    $
    8,567
    
    
    
    8,567Payment of dividends
    
    
    (2,676
    )
    
    
    
    
    
    
    
    
    
    
    (2,676
    )Losses on foreign intercompany loans,
net of gains on currency swaps,
net of tax of $434
    
    
    
    
    
    
    (739
    )
    
    
    (739
    )
    
    
    (739
    )Net unrealized gain on available-for-sale
investments, net of tax of $106
    
    
    
    
    
    
    180
    
    
    
    180
    
    
    
    180Foreign currency translation adjustment
    
    
    
    
    
    
    1,839
    
    
    
    1,839
    
    
    
    1,839Comprehensive income
    
    
    
    
    
    
    
    
    
    $
    9,847Balance at April 4, 2004 (unaudited)
    
    $
    264,615
    
    
    $
    (9,780
    )
    
    
    
    
    
    $
    416,521
 The accompanying notes are an integral part of these consolidated financial statements. 3




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COGNEX CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS  Three Months EndedApril 4,
    
    March 30,2004
    
    2003(unaudited)Cash flows from operating activities:Net income
    
    $
    8,567
    
    
    $
    1,793Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,566
    
    
    
    2,420Tax benefit from exercise of stock options
    
    
    3,949
    
    
    
    270Change in current assets and current liabilities
    
    
    (821
    )
    
    
    (289
    )Other
    
    
    (561
    )
    
    
    650Net cash provided by operating activities
    
    
    13,700
    
    
    
    4,844Cash flows from investing activities:Purchase of investments
    
    
    (71,993
    )
    
    
    (53,194
    )Maturity and sale of investments
    
    
    70,019
    
    
    
    37,554Purchase of property, plant, and equipment
    
    
    (570
    )
    
    
    (561
    )Net cash used in investing activities
    
    
    (2,544
    )
    
    
    (16,201
    )Cash flows from financing activities:Payment of dividends
    
    
    (2,676
    )
    
    
    Issuance of stock under stock option, stock
purchase, and other plans
    
    
    20,407
    
    
    
    1,186Net cash provided by financing activities
    
    
    17,731
    
    
    
    1,186Effect of foreign exchange rate changes on cash
    
    
    868
    
    
    
    276Net increase (decrease) in cash and cash equivalents
    
    
    29,755
    
    
    
    (9,895
    )Cash and cash equivalents at beginning of period
    
    
    76,227
    
    
    
    60,864Cash and cash equivalents at end of period
    
    $
    105,982
    
    
    $
    50,969
 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 April 4, 2004, and the
results of its operations for the three-month periods ended April 4, 2004 and
March 30, 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 period ended April 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. Stock-Based Compensation Plans The Company recognizes compensation costs using the intrinsic value based
method described in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees. Net income and net income per share as reported in
these consolidated financial statements and on a pro forma basis, as if the
fair value based method described in Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, had been adopted,
are as follows (in thousands): Three Months EndedApril 4,
    
    March 30,2004
    
    2003Net income, as reported
    
    $
    8,567
    
    
    $
    1,793Less: Total stock-based compensation costs
determined under fair value based method, net
of tax
    
    
    (3,703
    )
    
    
    (3,171
    )Net income (loss), pro forma
    
    $
    4,864
    
    
    $
    (1,378
    )Basic net income per share, as reported
    
    $
    0.19
    
    
    $
    0.04Basic net income (loss) per share, pro forma
    
    $
    0.11
    
    
    $
    (0.03
    )Diluted net income per share, as reported
    
    $
    0.18
    
    
    $
    0.04Diluted net income (loss) per share, pro forma
    
    $
    0.11
    
    
    $
    (0.03
    )
 For the purpose of providing pro forma disclosures, the fair values of stock
options granted were estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions: Three Months EndedApril 4,
    
    March 30,2004
    
    2003Risk-free interest rate
    
    
    2.8
    %
    
    
    2.0
    %Expected life (in years)
    
    
    3.2
    
    
    
    2.4Expected volatility
    
    
    45
    %
    
    
    59
    %Expected annualized dividend yield
    
    
    .69
    %
    
    
    
 5




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: New Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, to expand
upon and strengthen existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities, and
activities of another entity. Previously, a company generally included other
entities in its consolidated financial statements only if it controlled the
entity through voting interests. Interpretation No. 46 changes that guidance
by requiring variable interest entities, as defined, to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or is entitled to receive a majority of
the entitys residual returns. Interpretation No. 46 also requires disclosure
about variable interest entities that a company is not required to consolidate,
but in which it has a significant variable interest. On December 24, 2003, the
FASB deferred the effective date of Interpretation No. 46 for certain
transactions until periods ending after March 15, 2004. The adoption of
Interpretation No. 46 during the quarter ended April 4, 2004 did not have a
material impact on the Companys consolidated financial statements. The Company has a limited partnership interest in Venrock Associates III, L.P.,
a venture capital fund and a deposit on certain real estate for which it has an
option to purchase. While the Companys investment in these entities
represents a variable interest, the Company believes it is not the primary
beneficiary. NOTE 3: Cash, Cash Equivalents, and Investments Cash, cash equivalents, and investments consist of the following (in
thousands): April 4,
    
    December 31,2004
    
    2003Cash
    
    $
    85,936
    
    
    $
    49,980Municipal bonds
    
    
    20,046
    
    
    
    26,247Total cash and cash
equivalents
    
    
    105,982
    
    
    
    76,227Municipal bonds
    
    
    80,752
    
    
    
    56,406Total short-term
investments
    
    
    80,752
    
    
    
    56,406Municipal bonds
    
    
    132,687
    
    
    
    156,511Corporate bonds
    
    
    4,188
    
    
    
    4,212Limited partnership interest
    
    
    11,050
    
    
    
    10,146Total long-term
investments
    
    
    147,925
    
    
    
    170,869$
    334,659
    
    
    $
    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
$14,375,000 and $13,625,000 had been contributed as of April 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. During the three-month period ended April 4, 2004, the Company recorded
realized gains on the funds investments, net of fund expenses,
of $154,000. At April 4, 2004, the carrying value of this
investment was $11,050,000 compared to an estimated fair value, as
determined by the General Partner, of $10,212,000. The unrealized
loss of $838,000 was determined to be temporary. 6




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: Inventories Inventories consist of the following (in thousands): April 4,
    
    December 31,2004
    
    2003Raw materials
    
    $
    7,727
    
    
    $
    8,948Work-in-process
    
    
    4,579
    
    
    
    3,514Finished goods
    
    
    1,915
    
    
    
    3,057$
    14,221
    
    
    $
    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 in the inventory-related reserves
established in the fourth quarter of 2001 (in thousands): Statement ofBalance Sheet
    
    OperationsInventories
    
    Accrued Expenses
    
    BenefitsReserve balance at December 31, 2003
    
    $
    9,383
    
    
    $
    1,400Benefits to cost of product revenue recorded in 2003
    
    
    
    
    
    
    
    
    
    $
    1,290Inventory sold to customers
    
    
    (216
    )
    
    
    
    
    
    $
    216Inventory sold to brokers
    
    
    (46
    )
    
    
    
    
    
    
    46Write-off and scrap of inventory
    
    
    (59
    )
    
    
    
    
    
    
    Reserve balance at April 4, 2004
    
    $
    9,062
    
    
    $
    1,400Benefits to cost of product revenue recorded in 2004
    
    
    
    
    
    
    
    
    
    $
    262
 A favorable settlement of the remaining purchase commitments may result in a
recovery of a portion of the remaining $1,400,000 accrued at April 4, 2004. 7




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5: Intangible Assets Amortized intangible assets consist of the following (in thousands): Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    CarryingApril 4, 2004
    
    Amount
    
    Amortization
    
    AmountCustomer contracts and relationships
    
    $
    7,600
    
    
    $
    706
    
    
    $
    6,894Complete technology
    
    
    5,364
    
    
    
    4,417
    
    
    
    947Patents
    
    
    109
    
    
    
    22
    
    
    
    87Non-compete agreements
    
    
    48
    
    
    
    16
    
    
    
    32$
    13,121
    
    
    $
    5,161
    
    
    $
    7,960
 Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    CarryingDecember 31, 2003
    
    Amount
    
    Amortization
    
    AmountCustomer 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 periods ended April 4, 2004
and March 30, 2003 was $383,000 and $102,000, respectively. Estimated amortization expense for the current fiscal year and succeeding
fiscal years is as follows (in thousands): Year
    
    Amount2004
    
    $
    1,5102005
    
    
    1,2042006
    
    
    1,0852007
    
    
    1,0332008
    
    
    942Thereafter
    
    
    2,569Total
    
    $
    8,343
 8




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: Goodwill The Company has two reporting units with goodwill, the Modular Vision Systems
Division (MVSD) and the Surface Inspection Systems Division (SISD), which are
also reportable segments. The changes in the carrying amount of goodwill during the three-month period
ended April 4, 2004 are as follows (in thousands): MVSD
    
    SISD
    
    ConsolidatedBalance at December 31, 2003
    
    $
    4,522
    
    
    $
    2,700
    
    
    $
    7,222Purchase price adjustment (Note 12)
    
    
    (514
    )
    
    
    
    
    
    
    (514
    )Foreign exchange rate changes
    
    
    (165
    )
    
    
    (96
    )
    
    
    (261
    )Balance at April 4, 2004
    
    $
    3,843
    
    
    $
    2,604
    
    
    $
    6,447
 NOTE 7: Warranty Obligations The Company warrants its hardware products to be free from defects in material
and workmanship for periods ranging from six months to two years from the time
of sale based upon the product being purchased and the terms of the customers
contract. Estimated warranty obligations are evaluated and recorded at the
time of sale based upon historical costs to fulfill warranty obligations.
Provisions may also be recorded subsequent to the time of sale whenever
specific events or circumstances impacting product quality that would not have
been taken into account using historical data become known. Warranty
obligations are included in Accrued expenses on the Consolidated Balance
Sheets. The changes in the warranty obligation are as follows (in thousands): Balance at December 31, 2003
    
    $
    2,119Provisions for warranties issued during the period
    
    
    422Fulfillment of warranty obligations
    
    
    (342
    )Foreign exchange rate changes
    
    
    (54
    )Balance at April 4, 2004
    
    $
    2,145
 NOTE 8: Indemnification Provisions Except as limited by Massachusetts law, the by-laws of the Company require it
to indemnify certain current or former directors, officers, and employees of
the Company against expenses incurred by them in connection with each
proceeding in which he or she is involved as a result of serving or having
served in certain capacities. Indemnification is not available with respect to
a proceeding as to which it has been adjudicated that the person did not act in
good faith in the reasonable belief that the action was in the best interests
of the Company. The maximum potential amount of future payments the Company
could be required to make under these provisions is unlimited. The Company has
never incurred significant costs related to these indemnification provisions.
As a result, the Company believes the estimated fair value of these provisions
is minimal. 9




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: Indemnification Provisions (continued) The Company accepts standard limited indemnification provisions in the ordinary
course of business, whereby it indemnifies its customers for certain direct
damages incurred in connection with third-party patent or other intellectual
property infringement claims with respect to the use of the Companys products.
The term of these indemnification provisions generally coincides with the
customers use of the Companys products. The maximum potential amount of
future payments the Company could be required to make under these provisions is
always subject to fixed monetary limits. The Company has never incurred
significant costs to defend lawsuits or settle claims related to these
indemnification provisions. As a result, the Company believes the estimated
fair value of these provisions is minimal. The Company also accepts limited indemnification provisions from time to time,
whereby it indemnifies customers for certain direct damages incurred in
connection with bodily injury and property damage arising from the installation
of the Companys products. The term of these indemnification provisions
generally coincides with the period of installation. The maximum potential
amount of future payments the Company could be required to make under these
provisions is limited and is likely recoverable under the Companys insurance
policies. As a result of this coverage, and the fact that the Company has
never incurred significant costs to defend lawsuits or settle claims related to
these indemnification provisions, the Company believes the estimated fair value
of these provisions is minimal. NOTE 9: Guarantees On March 25, 2004, the Company provided standby letters of credit totaling
3,146,280,000 Yen (or approximately $30,091,000 based upon the exchange rate at
April 4, 2004) to taxing authorities in Japan. These standby letters of credit
replace the bank guarantees that the Company provided on May 27, 2003 and 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 to collateralize these tax
assessments. These guarantees expire in approximately one year. Should the
TRTB prevail in its assertion, the income in question would be taxable in Japan
and the Company would be required to pay approximately $30,091,000 in taxes,
interest and penalties to Japanese taxing authorities. The Company would then
be entitled to a recoup the majority of this amount from taxing authorities in
the U.S. 10




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: Net Income Per Share Net income per share is calculated as follows (In thousands, except per share
amounts): Three Months EndedApril 4,
    
    March 30,2004
    
    2003(unaudited)Net income
    
    $
    8,567
    
    
    $
    1,793Basic:Weighted-average common shares outstanding
    
    
    44,512
    
    
    
    42,666Net income per common share
    
    $
    0.19
    
    
    $
    0.04Diluted:Weighted-average common shares outstanding
    
    
    44,512
    
    
    
    42,666Effect of dilutive stock options
    
    
    2,240
    
    
    
    891Weighted-average common and common-equivalent
shares outstanding
    
    
    46,752
    
    
    
    43,557Net income per common and common-equivalent share
    
    $
    0.18
    
    
    $
    0.04
 Stock options to purchase 857,214 and 6,127,543 shares of common stock were
outstanding during the three-month periods ended April 4, 2004 and March 30,
2003, respectively, 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 11: Segment Information The Company has two reportable segments: the Modular Vision Systems Division
(MVSD) and the Surface Inspections Systems Division (SISD). MVSD designs,
develops, manufactures, and markets modular vision systems that are used to
control the manufacturing of discrete items by locating, identifying,
inspecting, and measuring them during the manufacturing process. SISD designs,
develops, manufactures, and markets surface inspection vision systems that are
used to inspect surfaces of materials that are processed in a continuous
fashion to ensure there are no flaws or defects in the surfaces. Segments are
determined based upon the way that management organizes its business for making
operating decisions and assessing performance. The Company evaluates segment
performance based upon income or loss from operations. The following table summarizes information about the Companys segments (in
thousands): ReconcilingMVSD
    
    SISD
    
    Items
    
    ConsolidatedThree Months EndedApril 4, 2004Product revenue
    
    $
    38,379
    
    
    $
    4,181
    
    
    $
    
    
    
    $
    42,560Service revenue
    
    
    3,892
    
    
    
    1,717
    
    
    
    
    
    
    
    5,609Operating income
    
    
    12,281
    
    
    
    93
    
    
    
    (2,206
    )
    
    
    10,168Three Months EndedMarch 30, 2003Product revenue
    
    $
    23,528
    
    
    $
    4,720
    
    
    $
    
    
    
    $
    28,248Service revenue
    
    
    3,101
    
    
    
    1,539
    
    
    
    
    
    
    
    4,640Operating income
    
    
    3,357
    
    
    
    514
    
    
    
    (1,926
    )
    
    
    1,945
 11




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11: Segment Information (continued) Reconciling items consist of unallocated corporate expenses, which primarily
include corporate headquarters costs and patent infringement litigation. Asset
information by segment is not produced internally for use by the chief
operating decision maker, and therefore, is not presented. Asset information
is not provided because the cash and investments are commingled and the
divisions share assets and resources in a number of locations around the world. NOTE 12: 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 enhances 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. 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
$2,063,000) 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. 12




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12: Acquisitions (continued) 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 $303,000 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 13: Dividends On February 5, 2004, the Companys Board of Directors declared a cash dividend
of $0.06 per share. The dividend was paid on March 5, 2004 to all stockholders
of record at the close of business on February 20, 2004. NOTE 14: Subsequent Event On April 22, 2004, the Companys Board of Directors declared a cash dividend of
$0.06 per share. The dividend is payable on May 21, 2004 to all stockholders
of record at the close of business on May 7, 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. The Company cautions readers not to
place undue reliance upon any such forward-looking statements, which speak only
as of the date made. The Company disclaims any obligation to subsequently
revise forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date such statements are made. Results of Operations Revenue Revenue for the quarter ended April 4, 2004 increased 46% to $48,169,000 from
$32,888,000 for the quarter ended March 30, 2003. The majority of this growth
came from sales to the Companys Original Equipment Manufacturer (OEM)
customers who make capital equipment used in the semiconductor industry. Sales
to OEM customers increased $11,932,000, or 96%, from the prior year. Sales to
end-user customers increased $3,349,000, or 16%, due to higher demand from
customers across a variety of industries. Although sales to end-user customers
grew from the prior year, they only represented 49% of total revenue in the
first quarter of 2004 compared to 62% in the same quarter of 2003 due to the
increase in the OEM business. 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 OEM customers are located. Product revenue for the quarter ended April 4, 2004 increased 51% to
$42,560,000 from $28,248,000 from the quarter ended March 30, 2003. The
increase in product revenue was primarily due to a higher volume of machine
vision systems sold to customers in the semiconductor industry. Service
revenue, which is derived from the sale of maintenance and support, education,
consulting, and installation services, increased 21% to $5,609,000 from
$4,640,000. Many of the Companys products that were sold during the first
quarter of 2004 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 as significantly as
product revenue, and it decreased as a percentage of total revenue to 12% in
2004 compared to 14% in 2003. 14




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##### Table of Contents



MVSD revenue for the quarter ended April 4, 2004 increased 59% to $42,271,000
from $26,629,000 for the quarter ended March 30, 2003. The increase in MVSD
revenue was primarily due to a higher volume of modular vision systems sold to
customers in the semiconductor industry. SISD revenue for the quarter ended
April 4, 2004 decreased 6% to $5,898,000 from $6,259,000 for the quarter ended
March 30, 2003 due to the timing of system shipments and installations. SISD
revenue decreased as a percentage of total revenue to 12% in 2004 compared to
19% in 2003 due to the lower level of sales, as well as the increase in the
MVSD OEM business. Gross Margin Gross margin as a percentage of revenue was 69% for the quarter ended April 4,
2004 compared to 64% for the quarter ended March 30, 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 73% for the quarter ended
April 4, 2004 compared to 69% for the quarter ended March 30, 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 38% for the quarter ended
April 4, 2004 compared to 39% for the quarter ended March 30, 2003. The
decrease in service margin was due principally to higher SISD service costs
required to support the growing installed base of surface inspection systems. MVSD gross margin as a percentage of revenue was 72% for the quarter ended
April 4, 2004 compared to 68% for the quarter ended March 30, 2003. The
increase in MVSD margin was due primarily to the higher sales volume of modular
vision systems. SISD gross margin as a percentage of revenue remained
consistent with the prior year at 47% despite the lower level of sales due to
product cost improvements. Operating Expenses Research, development, and engineering expenses (R,D&E) for the quarter ended
April 4, 2004 increased 15% to $6,898,000 from $5,983,000 for the quarter ended
March 30, 2003. MVSD R,D&E expenses increased $927,000, or 17%, from the prior
year primarily due to higher personnel-related costs, including the additional
engineering personnel resulting from the acquisition of the machine vision
business of Gavitec AG on December 1, 2003 and the accrual of anticipated
company bonuses for 2004. SISD R,D&E expenses were essentially flat with the
prior year. Selling, general, and administrative (S,G&A) expenses for the quarter ended
April 4, 2004 increased 23% to $16,314,000 from $13,244,000 for the quarter
ended March 30, 2003. MVSD S,G&A expenses increased $2,512,000, or 26%, from
the prior year and SISD S,G&A expenses increased $278,000, or 16%, from 2003.
Corporate expenses that are not allocated to a division increased $280,000, or
15%, from the prior year. 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) The Company recorded foreign currency gains of $625,000 for the quarter ended
April 4, 2004 compared to losses of $627,000 for the same period 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. Investment and Other Income Investment and other income decreased slightly to $1,274,000 for the quarter
ended April 4, 2004 from $1,294,000 for the same period in 2003 due to lower
average interest rates on the Companys invested balances. 15




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##### Table of Contents



Income Taxes The Companys effective tax rate for the quarter ended April 4, 2004 was 29%
compared to 31% for the quarter ended March 30, 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 April 4, 2004, the Companys cash, cash equivalent, and investment balances
increased $31,157,000 to $334,659,000 from $303,502,000 at December 31, 2003.
The Companys cash requirements during the quarter ended April 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
$20,407,000. Cash requirements consisted
of operating activities, capital expenditures, and the payment of dividends.
Capital expenditures during the quarter ended April 4, 2004 totaled $570,000
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
$14,375,000 had been contributed as of April 4, 2004, including $750,000 during
the quarter ended April 4, 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 7,000,000 Euros in cash (or approximately $7,630,000),
with the potential for an additional cash payment in 2005 of up to 1,700,000
Euros (or approximately $2,063,000) depending upon the achievement of certain
performance criteria. 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). 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 $303,000 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. There were no
shares repurchased under this program during the quarter ended April 4, 2004.
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 February 5, 2004, the Companys Board of Directors declared a cash dividend
of $0.06 per share. The dividend, amounting to $2,676,000, was paid on March
5, 2004 to all stockholders of record at the close of business on February 20,
2004. On April 22, 2004, the Companys Board of Directors declared a cash
dividend of $0.06 per share payable on May 21, 2004 to all stockholders of
record at the close of business on May 7, 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 continued positive 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. 16




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##### Table of Contents



New Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, to expand
upon and strengthen existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities, and
activities of another entity. Previously, a company generally included other
entities in its consolidated financial statements only if it controlled the
entity through voting interests. Interpretation No. 46 changes that guidance
by requiring variable interest entities, as defined, to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or is entitled to receive a majority of
the entitys residual returns. Interpretation No. 46 also requires disclosure
about variable interest entities that a company is not required to consolidate,
but in which it has a significant variable interest. On December 24, 2003, the
FASB deferred the effective date of Interpretation No. 46 for certain
transactions until periods ending after March 15, 2004. The adoption of
Interpretation No. 46 during the quarter ended April 4, 2004 did not have a
material impact on the Companys consolidated financial statements. The Company has a limited partnership interest in Venrock Associates III, L.P.,
a venture capital fund and a deposit on certain real estate for which it has an
option to purchase. While the Companys investment in these entities
represents a variable interest, the Company believes it is not the primary
beneficiary. 
 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 April
4, 2004 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. 17




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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, which are
material to the Company. There have been no material developments
in such legal proceedings since December 31, 2003. 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  None 
 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
193431.2  Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of
193432.1  Certification of Chief Executive Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2  Certification of Chief Financial Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K  On January 26, 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 December 31, 2003. 18




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. DATE:
May 10, 2004
    
    
    
    COGNEX CORPORATIONBy:
    
    /s/ Robert J. ShillmanRobert J. ShillmanPresident, Chief Executive Officer,and Chairman of the Board of Directors(duly authorized officer, principal executive officer)By:
    
    /s/ Richard A. Morin Richard A. MorinSenior Vice President of Finance, ChiefFinancial Officer, and Treasurer(duly authorized officer, principal financial and accounting officer)
 19