##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended April 2, 2006
 or
 o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from  to
 Commission
File Number 0-17869
 COGNEX
CORPORATION
 (Exact name of registrant as specified in its charter)
 Massachusetts
    
    04-2713778(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 One Vision Drive
Natick, Massachusetts 01760-2059
(508) 650-3000
 (Address, including
zip code, and telephone number,  including area code,
of principal executive offices)
  þ o
  þ o o
  o þ




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##### 



INDEX
  
 PART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Statements of Operations for the three-month periods
ended April 2, 2006 and April 3, 2005Consolidated Balance Sheets at April 2, 2006 and December 31, 2005Consolidated Statement of Shareholders Equity for the
three-month period ended April 2, 2006Consolidated Condensed Statements of Cash Flows for the
three-month periods ended April 2, 2006 and April 3, 2005Notes 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 1A.
    
    Risk FactorsItem 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
    
    Defaults Upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    ExhibitsSignaturesEX-31.1 SECTION 302 CERTIFICATION OF THE C.E.O.EX-31.2 SECTION 302 CERTIFICATION OF THE C.F.O.EX-32.1 SECTION 906 CERTIFICATION OF THE C.E.O.EX-32.2 SECTION 906 CERTIFICATION OF THE C.F.O.




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 ITEM 1: FINANCIAL STATEMENTS
 COGNEX CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedApril 2,
    
    
    April 3,2006
    
    
    2005(unaudited)RevenueProduct
    
    $
    53,649
    
    
    $
    37,177Service
    
    
    5,391
    
    
    
    6,02159,040
    
    
    
    43,198Cost of revenueProduct (1)
    
    
    13,046
    
    
    
    10,357Service (1)
    
    
    3,664
    
    
    
    3,43316,710
    
    
    
    13,790Gross marginProduct
    
    
    40,603
    
    
    
    26,820Service
    
    
    1,727
    
    
    
    2,58842,330
    
    
    
    29,408Research, development, and engineering expenses (1)
    
    
    7,917
    
    
    
    6,315Selling, general, and administrative expenses (1)
    
    
    23,779
    
    
    
    17,508Operating income
    
    
    10,634
    
    
    
    5,585Foreign currency gain (loss)
    
    
    (145
    )
    
    
    99Investment and other income
    
    
    1,566
    
    
    
    1,470Income before provision for income taxes
    
    
    12,055
    
    
    
    7,154Income tax provision
    
    
    3,255
    
    
    
    1,860Net income
    
    $
    8,800
    
    
    $
    5,294Net income per common and common-equivalent share:Basic
    
    $
    0.19
    
    
    $
    0.11Diluted
    
    $
    0.18
    
    
    $
    0.11Weighted-average common and common-equivalent shares outstanding:Basic
    
    
    46,922
    
    
    
    46,235Diluted
    
    
    48,419
    
    
    
    47,181Cash dividends per common share
    
    $
    0.08
    
    
    $
    0.08
 
 (1) Amounts include stock-based compensation expense, as follows:Product cost of revenue
    
    $
    156
    
    
    $
    Service cost of revenue
    
    
    199
    
    
    
    Research, development, and engineering
    
    
    782
    
    
    
    Selling, general, and administrative
    
    
    1,819
    
    
    
    Total stock-based compensation expense
    
    $
    2,956
    
    
    $
    
 
 1




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COGNEX CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
 April 2,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    81,880
    
    
    $
    72,856Short-term investments
    
    
    169,162
    
    
    
    169,156Accounts receivable, less reserves of
$2,394 and $2,370 in 2006 and 2005,
respectively
    
    
    42,200
    
    
    
    42,051Inventories, net
    
    
    22,021
    
    
    
    18,819Deferred income taxes
    
    
    7,746
    
    
    
    7,667Prepaid expenses and other current assets
    
    
    12,222
    
    
    
    16,104Total current assets
    
    
    335,231
    
    
    
    326,653Long-term investments
    
    
    52,408
    
    
    
    70,246Property, plant, and equipment, net
    
    
    24,240
    
    
    
    24,175Deferred income taxes
    
    
    11,599
    
    
    
    10,227Intangible assets, net
    
    
    48,704
    
    
    
    50,049Goodwill
    
    
    79,922
    
    
    
    79,807Other assets
    
    
    3,394
    
    
    
    3,405$
    555,498
    
    
    $
    564,562LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,249
    
    
    $
    7,118Accrued expenses
    
    
    44,438
    
    
    
    43,476Customer deposits
    
    
    1,736
    
    
    
    2,142Deferred revenue
    
    
    7,011
    
    
    
    5,305Total current liabilities
    
    
    59,434
    
    
    
    58,041Commitments (Notes 2, 6, 7, and 8)Shareholders equity:Common stock, $.002 par value 
Authorized: 140,000 shares, issued: 46,551 and 47,171 shares in 2006
and 2005, respectively
    
    
    93
    
    
    
    94Additional paid-in capital
    
    
    200,195
    
    
    
    216,031Retained earnings
    
    
    309,469
    
    
    
    304,454Accumulated other comprehensive loss
    
    
    (13,693
    )
    
    
    (14,058
    )Total shareholders equity
    
    
    496,064
    
    
    
    506,521$
    555,498
    
    
    $
    564,562
  2




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##### Table of Contents



COGNEX
CORPORATION
 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Par Value
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Income
    
    
    EquityBalance at December 31, 2005
    
    
    47,171
    
    
    $
    94
    
    
    $
    216,031
    
    
    $
    304,454
    
    
    $
    (14,058
    )
    
    
    
    
    
    $
    506,521Issuance of stock under stock option plans
    
    
    259
    
    
    
    
    
    
    
    5,436
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,436Stock-based compensation expenses
    
    
    
    
    
    
    
    
    
    
    2,956
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,956Excess tax benefit from stock option
exercises
    
    
    
    
    
    
    
    
    
    
    798
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    798Payment of dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,785
    )
    
    
    
    
    
    
    
    
    
    
    (3,785
    )Repurchase of Common Stock
    
    
    (879
    )
    
    
    (1
    )
    
    
    (25,026
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,027
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,800
    
    
    
    
    
    
    $
    8,800
    
    
    
    8,800Gains on long-term intercompany
loans, net of losses on currency
swaps, net of tax of $27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    47
    
    
    
    47Net unrealized gain on
available-for-sale investments, net of
tax of $27
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    47
    
    
    
    47Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271
    
    
    
    271
    
    
    
    271Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,165Balance at April 2, 2006 (unaudited)
    
    
    46,551
    
    
    $
    93
    
    
    $
    200,195
    
    
    $
    309,469
    
    
    $
    (13,693
    )
    
    
    
    
    
    $
    496,064
  3




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COGNEX CORPORATION
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 Three Months EndedApril 2,
    
    
    April 3,2006
    
    
    2005(unaudited)Cash flows from operating activities:Net income
    
    $
    8,800
    
    
    $
    5,294Adjustments to reconcile net income to net cash
provided by operating activities:Stock-based
compensation expenses
    
    
    2,956
    
    
    
    Depreciation and amortization
    
    
    2,810
    
    
    
    2,536Excess tax benefit from stock option exercises
    
    
    (798
    )
    
    
    333Deferred income tax expense
    
    
    (1,469
    )
    
    
    522Change in current assets and current liabilities
    
    
    2,044
    
    
    
    (1,057
    )Other
    
    
    17
    
    
    
    191Net cash provided by operating activities
    
    
    14,360
    
    
    
    7,819Cash flows from investing activities:Purchase of investments
    
    
    (166,310
    )
    
    
    (167,137
    )Maturity and sale of investments
    
    
    183,920
    
    
    
    162,681Purchase of property, plant, and equipment
    
    
    (1,031
    )
    
    
    (767
    )Net cash provided by (used in) investing activities
    
    
    16,579
    
    
    
    (5,223
    )Cash flows from financing activities:Payment of dividends
    
    
    (3,785
    )
    
    
    (3,698
    )Repurchase of common stock
    
    
    (25,027
    )
    
    
    Issuance of stock under stock option plans
    
    
    5,436
    
    
    
    2,542Excess tax benefit from stock option exercises
    
    
    798
    
    
    
    Net cash used in financing activities
    
    
    (22,578
    )
    
    
    (1,156
    )Effect of foreign exchange rate changes on cash
    
    
    663
    
    
    
    (648
    )Net increase in cash and cash equivalents
    
    
    9,024
    
    
    
    792Cash and cash equivalents at beginning of period
    
    
    72,856
    
    
    
    54,270Cash and cash equivalents at end of period
    
    $
    81,880
    
    
    $
    55,062
  4




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COGNEX CORPORATION





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1: Summary of Significant Accounting Policies


NOTE 2: Cash, Cash Equivalents, and Investments
  April 2,
    
    
    December 31,2006
    
    
    2005Cash
    
    $
    78,880
    
    
    $
    72,856Cash equivalents
    
    
    3,000
    
    
    
    Total cash and cash
equivalents
    
    
    81,880
    
    
    
    72,856Municipal bonds
    
    
    134,955
    
    
    
    140,718Commercial paper
    
    
    27,720
    
    
    
    24,584Corporate bonds
    
    
    6,487
    
    
    
    2,500Treasury bills
    
    
    
    
    
    
    1,354Total short-term
investments
    
    
    169,162
    
    
    
    169,156Municipal bonds
    
    
    42,025
    
    
    
    59,863Limited partnership
interest
    
    
    10,383
    
    
    
    10,383Total long-term
investments
    
    
    52,408
    
    
    
    70,246$
    303,450
    
    
    $
    312,258
   5




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3: Inventories


April 2,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    9,024
    
    
    $
    8,958Work-in-process
    
    
    2,606
    
    
    
    3,406Finished goods
    
    
    10,391
    
    
    
    6,455$
    22,021
    
    
    $
    18,819
   Statement ofBalance Sheet
    
    
    OperationsInventories
    
    
    Accrued Expenses
    
    
    BenefitsReserve balance at December 31, 2005
    
    $
    5,884
    
    
    $
    1,400Benefits to cost of product revenue
recorded in the first quarter of
2005
    
    
    
    
    
    
    
    
    
    $
    118Inventory sold to customers
    
    
    (252
    )
    
    
    
    
    
    $
    252Inventory sold to brokers
    
    
    (193
    )
    
    
    
    
    
    
    Write-off and scrap of inventory
    
    
    (88
    )
    
    
    
    
    
    
    Reserve balance at April 2, 2006
    
    $
    5,351
    
    
    $
    1,400Benefits to cost of product revenue
recorded in the first quarter of
2006
    
    
    
    
    
    
    
    
    
    $
    252
  6




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4: Intangible Assets


Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingApril 2, 2006
    
    Amount
    
    
    Amortization
    
    
    AmountDistribution networks
    
    $
    38,060
    
    
    $
    3,012
    
    
    $
    35,048Customer contracts and relationships
    
    
    12,333
    
    
    
    2,889
    
    
    
    9,444Completed technologies
    
    
    6,673
    
    
    
    3,353
    
    
    
    3,320Other
    
    
    1,267
    
    
    
    375
    
    
    
    892$
    58,333
    
    
    $
    9,629
    
    
    $
    48,704
 Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    CarryingDecember 31, 2005
    
    Amount
    
    
    Amortization
    
    
    AmountDistribution networks
    
    $
    38,060
    
    
    $
    2,191
    
    
    $
    35,869Customer contracts and relationships
    
    
    12,186
    
    
    
    2,520
    
    
    
    9,666Completed technologies
    
    
    9,028
    
    
    
    5,491
    
    
    
    3,537Other
    
    
    1,264
    
    
    
    287
    
    
    
    977$
    60,538
    
    
    $
    10,489
    
    
    $
    50,049
   Year
    
    
    Amount2006
    
    $
    4,3562007
        
    5,4822008
        
    5,4832009
        
    5,2982010
        
    5,205Thereafter
        
    22,880Total
        $
    48,704
 7




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5: Goodwill
   MVSD
    
    
    SISD
    
    
    ConsolidatedBalance at December 31, 2005
    
    $
    77,266
    
    
    $
    2,541
    
    
    $
    79,807Foreign exchange rate changes
    
    
    55
    
    
    
    60
    
    
    
    115Balance at April 2, 2006
    
    $
    77,321
    
    
    $
    2,601
    
    
    $
    79,922
  NOTE 6: Warranty Obligations
   Balance at December 31, 2005
    
    $
    1,447Provisions for warranties issued during the period
    
    
    290Fulfillment of warranty obligations
    
    
    (235
    )Foreign exchange rate changes
    
    
    20Balance at April 2, 2006
    
    $
    1,522
 NOTE 7: Indemnification Provisions
   8




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7: Indemnification Provisions (continued)
   NOTE 8: Standby Letters of Credit and Income Taxes
  NOTE 9: Stock-Based Compensation Expense
   9




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9: Stock-Based Compensation Expense (continued)
  st st
   Weighted-Weighted-
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    Contractual
    
    
    AggregateShares
    
    
    Price
    
    
    Term
    
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    10,675
    
    
    $
    25.36Granted
    
    
    1,464
    
    
    
    29.35Exercised
    
    
    (257
    )
    
    
    21.02Forfeited or Expired
    
    
    (81
    )
    
    
    27.96Outstanding at April 2, 2006
    
    
    11,801
    
    
    $
    25.94
    
    
    
    7.2
    
    
    $
    51,505Exercisable at April 2, 2006
    
    
    6,881
    
    
    $
    25.47
    
    
    
    5.9
    
    
    $
    37,504
    Three Months EndedApril 2,
    
    
    April 3,2006
    
    
    2005Risk-free rate
    
    
    4.5
    %
    
    
    3.4
    %Expected dividend yield
    
    
    1.10
    %
    
    
    1.27
    %Expected volatility
    
    
    45
    %
    
    
    35
    %Expected term (in years)
    
    
    4.0
    
    
    
    2.8
 Risk-free
rate
 10




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9: Stock-Based Compensation Expense (continued)
 Expected
dividend yield
  Expected
volatility
 Expected
term
      11




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9: Stock-Based Compensation Expense (continued)
 Three MonthsEndedApril 3, 2005Net income, as reported
    
    $
    5,294Less: Total stock-based compensation expense
determined under fair value based method, net of tax
    
    
    (2,311
    )Net income, pro forma
    
    $
    2,983Basic net income per share, as reported
    
    $
    0.11Basic net income per share, pro forma
    
    $
    0.06Diluted net income per share, as reported
    
    $
    0.11Diluted net income per share, pro forma
    
    $
    0.06
 NOTE 10: Net Income Per Share
  Three Months EndedApril 2,
    
    
    April 3,2006
    
    
    2005(unaudited)Net income
    
    $
    8,800
    
    
    $
    5,294Basic:Weighted-average common shares outstanding
    
    
    46,922
    
    
    
    46,235Net income per common share
    
    $
    0.19
    
    
    $
    0.11Diluted:Weighted-average common shares outstanding
    
    
    46,922
    
    
    
    46,235Effect of dilutive stock options
    
    
    1,497
    
    
    
    946Weighted-average common and common-equivalent
shares outstanding
    
    
    48,419
    
    
    
    47,181Net income per common and common-equivalent share
    
    $
    0.18
    
    
    $
    0.11
  12




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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 11: Segment Information
   Three Months Ended
    
    
    
    
    
    
    
    
    
    ReconcilingApril 2, 2006
    
    MVSD
    
    
    SISD
    
    
    Items
    
    
    ConsolidatedProduct revenue
    
    $
    49,297
    
    
    $
    4,352
    
    
    
    
    
    
    $
    53,649Service revenue
    
    
    3,096
    
    
    
    2,295
    
    
    
    
    
    
    
    5,391Operating income
    
    
    16,898
    
    
    
    231
    
    
    $
    (6,495
    )
    
    
    10,634Three Months EndedApril 3, 2005Product revenue
    
    $
    32,685
    
    
    $
    4,492
    
    
    
    
    
    
    $
    37,177Service revenue
    
    
    3,644
    
    
    
    2,377
    
    
    
    
    
    
    
    6,021Operating income
    
    
    7,039
    
    
    
    534
    
    
    $
    (1,988
    )
    
    
    5,585
 th
 NOTE 12: Acquisition of Siemens Dematic AG Wafer Identification Business
  13




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##### Table of Contents



COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 13: Dividends
  NOTE 14: Subsequent Event
  14




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Forward-Looking Statements
  Executive Overview
    Stock-Based Compensation Expense
    15




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Results of Operations
 Revenue
    Gross Margin
   16




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##### Table of Contents



Operating Expenses
    th
 Nonoperating Income
  17




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##### Table of Contents



Income Taxes
  Liquidity and Capital Resources
        
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  18




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##### Table of Contents



ITEM 4: CONTROLS AND PROCEDURES
  
 PART II: OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total
    
    
    MaximumNumber of
    
    
    Number ofShares
    
    
    SharesPurchased
    
    
    that Mayas Part of
    
    
    Yet BeTotal
    
    
    
    
    
    
    Publicly
    
    
    PurchasedNumber of
    
    
    Average
    
    
    Announced
    
    
    Under theShares
    
    
    Price Paid
    
    
    Plans or
    
    
    Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsJanuary 1  31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 1  28,
2006
    
    
    528,197
    
    
    $
    28.3362
    
    
    
    528,197
    
    
    
    March 1  April 2,
2006
    
    
    350,480
    
    
    
    28.4822
    
    
    
    350,480
    
    
    
    Total
    
    
    878,677
    
    
    $
    28.3944
    
    
    
    878,677
    
    
    
    36,886,000
 
 (1)
    
    On December 12, 2000, the Companys Board of Directors authorized the
repurchase of up to $100,000,000 of the Companys Common Stock. 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. 19




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##### Table of Contents



ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
     
 *
    
    Filed herewith**
    
    Furnished herewith 20




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##### Table of Contents



SIGNATURES
  DATE:
May 12, 2006
    
    
    
    COGNEX CORPORATIONBy:
    
    /s/ Robert J. ShillmanRobert J. Shillman
Chief Executive Officer, and Chairman of the Board of Directors
(duly authorized officer, principal executive officer)By:
    
    /s/ Richard A. MorinRichard A. Morin
Senior Vice President of Finance, Chief
Financial Officer, and Treasurer
(duly authorized officer, principal financial and accounting officer)
 21