1UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549FORMForm 10-K
(Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2000 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
(Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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(Exact name of registrant as specified in its charter)MASSACHUSETTS 04-2713778 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE VISION DRIVE NATICK, 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,(Address, including zip code, and telephone number,including area code, of principal executive offices)Securities registered pursuant to Section 12(b) of the Act:
NoneSecurities registered pursuant to Section 12(g) of the Act:
Common StockIndicate 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
Xþ No----- -----oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ]oAggregate market value of voting stock held by non-affiliates as of February
25, 2001: $983,555,00024, 2002: $949,350,000$.002 par value common stock outstanding as of February
25, 2001: 43,472,06324, 2002: 43,951,411 sharesDocuments incorporated by reference:
Specifically identified information inThe registrant intends to file a Definitive Proxy Statement pursuant to Regulation 14A within 120 days of the
Annual Report to Stockholders forend of the fiscal year ended December 31,2000, is2001. Portions of such Proxy Statement are incorporated by referenceinto Parts I and II hereof. Specifically identified informationinthe definitive Proxy Statement for the Special Meeting in Lieu of the 2000 Annual Meeting of Stockholders to be held on April 26, 2001, is incorporated by reference intoPart IIIhereof.of this report.A list of Exhibits to this Annual Report on Form 10-K is located on page
19253.TABLE OF CONTENTSCOGNEX CORPORATION ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
20002001INDEX
PART I Item 1. Business 2 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 4A Executive Officers and Other Members of The Management Team of The Registrant 13 PART II Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters 14 Item 6. Selected Consolidated Financial Data 15 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A Quantitative and Qualitative Disclosures About Market Risk 23 Item 8. Financial Statements and Supplementary Data 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 50 PART III Item 10. Directors and Executive Officers of The Registrant 50 Item 11. Executive Compensation 50 Item 12. Security Ownership of Certain Beneficial Owners and Management 50 Item 13. Certain Relationships and Related Transactions 51 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 51 1
PART I
ITEM 1. BUSINESS ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 4A. EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE REGISTRANT PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K3 PART IThe
Company'sCompany’s results are subject to certain risks and uncertainties. This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of the Federal Securities Laws. TheCompany'sCompany’s future results may differ materially from current results and actual results may differ materially from those projected in the forward-looking statements as a result ofcertain risk factors.risks and uncertainties. Readers should pay particular attention to considerations described in the section captioned"Forward-Looking Statements"“Risk Factors,” appearing inManagement's Discussion and AnalysisItem I ofFinancial Condition and Results of Operations appearing on page 32 of thethis Annual Reportto Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference, as well as considerations included in other documents filed with the Securities and Exchange Commission. ITEMon Form 10-K.Item 1.
BUSINESS CORPORATE PROFILE Cognex(R)BusinessCorporate Profile
Cognex® Corporation
("Cognex"(“Cognex” or the"Company,"“Company,” each of which term includes, unless the context indicates otherwise, Cognex Corporation and its subsidiaries) was incorporated in Massachusetts in 1981. Itsprincipal executive officescorporate headquarters are located at One Vision Drive, Natick, Massachusetts 01760 and its telephone number is (508) 650-3000.The Company designs, develops, manufactures, and markets machine vision systems that are used to automate a wide range of manufacturing
processes where vision is required. Cognex machine visionprocesses. These systems consist oftwo primary elements: a computer,sophisticated image analysis software and high-speed, special-purpose computers (vision engines) which,serves as a "machine vision engine," and software that processes and analyzes images. Whenwhen connected to a video camera,the machine vision system capturesinterpret video images andextractsgenerate informationwhich determines appropriate action for other equipment in the manufacturing process.about them.Machine vision systems are used in a variety of industries including the semiconductor, electronics, automotive, packaging, consumer products, pharmaceutical, paper, metals,
plastics,andpaperplastics industries. Machine vision is important for applications in which human vision is inadequateduetofatigue, visual acuity,meet requirements for repeatability, feature size, accuracy, or speed or in instances where substantial cost savings are obtained through the reduction of direct labor or improved product quality. Today, many types of manufacturing equipment require machine vision because of the increasing demands for speed and accuracy in manufacturing processes, as well as the decreasing feature size of items being manufactured.WHAT IS MACHINE VISION?The Company has two operating divisions: the Modular Vision Systems Division (MVSD), based in Natick, Massachusetts, and the Surface Inspection Systems Division (SISD), based in Alameda, California. MVSD designs, develops, manufactures, and markets modular vision systems that are used to control the manufacturing of discrete items, such as semiconductor chips, cellular phones, and medical instruments, 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 processed in a continuous fashion, such as paper, metals, plastics, and non-wovens, to ensure there are no flaws or defects on the surfaces. Historically, MVSD has been the source of the majority of the Company’s revenue, representing 83% of total revenue in 2001.
What is Machine Vision?
In a typical machine vision application, a video camera positioned on the production line captures an image of the part to be inspected. The machine vision computer then uses sophisticated image analysis
2
software to extract information from the image and provide an answer to a question. Cognex machine vision systems can answer four types of questions:
QUESTION DESCRIPTION EXAMPLE -------- ----------- -------Question Description Example Where is it? Determining the exact physical location and orientation of an object. Determining the position of a printed circuit location of an object.board so that a robot can automatically be guided to insert electronic components.14
What is it? Identifying an object by analyzing its shape or by reading a serial number. Identifying the serial number on an automotive its shape or by reading a serialairbag so that it can be tracked and processednumber.correctly through manufacturing.How good is it? Inspecting an object for flaws or defects. Inspecting the quality of printing on defects. pharmaceutical labels and packaging.paper that US currency is printed on.What size is it? Determining the dimensions of an object. Determining the diameter of a bearing prior object.to final assembly.Once the machine vision system has processed the image and performed any necessary analysis, the result is then communicated to other equipment on the factory floor, such as an industrial controller, a robotic arm, a deflector that removes the part from the line, a positioning table that moves the part, or alternatively, to a computer file for analysis or subsequent process control.
This process is repeated during the manufacturing process as product moves into position in front of the camera.Machine vision systems can performinspectionstasks quickly enough to keep pace with machines that process thousands of itemsor material feetper minutethus increasing both quality and productivity. THE MACHINE VISION MARKETor, in the case of surface inspection, thousands of square feet of material per minute.The Machine Vision Market
The machine vision market consists of two customer types: Original Equipment Manufacturers (OEMs) and end users. OEMs are companies that build standard products sold as capital equipment
forto endusers on the factory floor.users. These customers, most ofwhichwhom are in the semiconductor and electronics industries, have the technical expertise to buildCognex'sCognex’s programmable, board-level machine vision systems directly into their products which are then sold to end users.End users are companies that manufacture products, such as spark plugs, cellular telephones, surgical staples, metals, and paper. While they may purchase capital equipment containing machine vision or hire a system integrator to build an inspection system, many end users choose to purchase machine vision systems and install them directly
for specific applicationson their productionlines.lines to inspect products and control the manufacturing process. Unlike OEMs and system integrators, these customers typically havelittle or nolimited computer programming or machine vision experience.System integrators are companies that create complete, automated inspection solutions for end
users on the factory floor.users. For example, they combine lighting, conveyors, robotics, machine vision, and other components to produce custom inspection systems for various applications. Because system integrators encounter a broad range of automation problems, they purchase a variety of Cognex products, from general-purpose systems to application-specific systems tailored to solve particular manufacturing tasks. The Company includes system integrators in its definition of end users.BUSINESS STRATEGY3
Business Strategy
The
Company'sCompany’s goal is to expand its position as a leading worldwide supplier of machine vision systems for factory automation.Currently, the Company's products are designed for factory automation because the Company believes that this market offers the greatest opportunity for selling high value-added, standard products in high volume.Within the factory automation market, the Company has historically focused primarily on thosecustomers who must haveindustries where machine visionbecause of the increasing complexity of their productshas become essential, either from a regulatory, economic, or manufacturingmethods. 25complexity standpoint, for controlling the manufacturing process to ensure high quality and/or reduce manufacturing costs.Emphasizing high value-added products and applications is important to the
Company'sCompany’s strategy because not every segment of the machine vision market offers opportunity for sustained profitability. High value-added is realized in theCompany'sCompany’s products in several ways. The primary value-added is derived from offering unique vision software algorithms that solve challenging problems better than competing products. The other major mode of realizing high value-added is by offering products which are complete solutions to known problems, incorporating all of the necessary vision software, applications software, hardware, video cameras, and electro-optics. Both modes of realizing high value-added require the Company to maintain an industry-leading level of investment in research, development, and engineering.Within the factory automation market, the Company has tailored its product offerings to match the characteristics of its two customer types: OEMs and end users. Historically, OEMs have been the source of the majority of the
Company'sCompany’s revenue. However, the Company believes that end users have the potential in the long term to generate more revenue than OEMs. Consequently, the Company has invested in developing and acquiring products that meet the needs of end users and in developing a strong worldwide direct sales and support infrastructure. The Company will continue to invest in both customer types, defending its strong position in the OEM market while expanding in the end-user market. In 2001, approximately 56% of the Company’s revenue came from end-user customers.The Company has historically pursued a global business strategy, investing in building a strong direct presence in North America, Japan, Europe, and Southeast Asia. In all of these regions, the Company is acknowledged to be a leading machine vision supplier. The Company intends to continue to invest in the expansion of direct sales and support in these regions. In
2000,2001, approximately69%63% of theCompany'sCompany’s revenue came from customers based outside of the United States.The
factory automation market for machine vision is comprised of many market niches defined by differing application requirements, industries, and cost/performance criteria. The Company'sCompany’s business strategy includes selective expansion into otherindustrialmachine vision applications through the internal development of new products, as well as the acquisition ofcompaniesbusinesses and technologies.In 2000,Since 1995, the Company has completedthreeseven business acquisitions,allmost of which were targeted at expanding theCompany'sCompany’s presence in the worldwide end-user marketplace.In March, theThe Companyacquired selected assets ofplans to continue to seek out opportunities to expand its product line, customer base, and technical talent through acquisitions in the machine visionbusiness of Komatsu Ltd., a division of Komatsu based in Japan that developed application-specific machine vision systems for end users.industry. InApril,particular, the Companyacquired all of the outstanding shares of Image Industries Ltd., a privately-held, United Kingdom-based developer of low-cost vision sensorswill look forend users. In September,opportunities to acquire technologies that complement its product line or provide the Companyacquired selected assetswith an enhanced market presence around the world.Products
The Company’s MVSD products are sold to both OEM and end-user customers in a variety of industries including the
web inspection business of Honeywell International's Roibox subsidiary, a Finland-based developer of machine vision systems for inspecting paper. PRODUCTS The Company designs, develops, manufactures,semiconductor, electronics, automotive, packaging, consumer products, andmarkets a wide range of machine vision products.pharmaceutical industries. Theseproducts includemodular vision systemsthatare used to control the manufacturing of discrete itemssuch as semiconductor chips, cellular phones, and automobile wheels,by locating, identifying, inspecting, and measuring them during the manufacturing process.The Company's product offerings also include surface inspectionMVSD machine vision systemsthat are used to inspect surfaces of materials that are processed in a continuous fashion, such as plastics, metals, and paper, to ensure that there are no flaws or defects on the surfaces. Machine vision systems sold by the Company arecan be defined as either general-purpose orapplication-specific products.application-specific. General-purpose systems enable customers to solve a wide range of problems by selecting the tools necessary to solve their vision problem from theCompany'sCompany’s vision software library, and then configuring their solution by utilizing aprogrammableprogramming language orpoint-and-click“point-and-click” interface. Application-specific systems are"packaged"“packaged” combinations of software and hardware that are designed to solve targeted problems.36 GENERAL-PURPOSE SYSTEMSThe Company’s SISD products are sold to end-user customers primarily in the paper, metals, plastics, and non-woven industries. These surface inspection vision systems are used to inspect surfaces of materials that are processed in a continuous fashion to ensure there are no flaws or defects on the surfaces.
4
MVSD Products: General-Purpose Systems
Vision Software Library
The Company offers an extensive library of vision software that includes both low-level image processing software and high-level image analysis tools. The image processing software prepares the image for accurate analysis and the image analysis tools extract information about the image to locate,
measure,inspect, andinspectmeasure objects and identify characters and codes. The library includesPatMax(R)PatMax®, a pattern location tool that can locate with very high accuracy objects that vary in size and orientation or whose appearance isdegraded. The library also includes PatInspect(R)degraded, as well as PatInspect®, a vision software tool that combines high-accuracy part location and defect detection capabilities in a single vision operation and detects flaws along the edges or boundary regions of objects.In early
2000,2002, the Company introduced VisionPro®, an Active X-based software development environment that makes it easy for users to access Cognex’s library of core vision tools from within anew tool called PatFind(TM) forPC/ Microsoft-based environment and dramatically speeds theIn-Sight(TM) product line. PatFind is a part location tool based on the Company's industry-leading Search and PatMax software technologies.development of advanced vision applications.MVS-8000 Product Family
The
MVS-8000(TM)MVS-8000™ product family of programmable machine vision systems combinesCognex'sCognex’s unique algorithms withIntel'sIntel’s MMX instruction set. The MVS-8100 Series features PCI bus-mastering frame grabbers for high-speed image transfer from the video camera to the host PC for processing and display. The MVS-8200 Series of embedded CPU machine vision systemsenableenables all vision processing to occur on-board, freeing the PC to perform other tasks.In late 2001, the Company introduced the CDC-100™, a small, high-resolution digital Complimentary Metal-Oxide Semiconductor (CMOS) camera designed specifically for machine vision applications, and the CDC-50 standard format digital camera. Both cameras are designed for use with the MVS-8100D digital frame grabber. These products, in combination with Cognex’s vision software, provide a complete, tightly integrated solution to the Company’s customers.
The MVS-8000 product family is sold
primarilyto OEMs located in North America, Japan, Europe, and Southeast Asia who integrate the machine vision systems intomanufacturingcapital equipment for the semiconductor and electronics industries. These machine vision systems are also sold to system integrators locatedprincipallyin North America, Japan, Europe, and Southeast Asia who integrate the vision systems intomanufacturingcapital equipment for the factory floor inindustries ranging from automotive to consumer products.a broad range of industries.Checkpoint Product Family
Checkpoint(R)Checkpoint® is a family of PC-based machine vision systems for complex precision guidance, gauging, and defect inspection applications. Checkpoint features a graphical user interface and requires some knowledge of programming and machine vision to configure a vision application. Deployment of Checkpoint on the factory floor requires the services of trained system integrators to mechanically and electrically integrate Checkpoint into
manufacturingproduction lines.�� In mid
2000,2001, the Company introduced two new models to its CheckpointII, the next-generation versionproduct line. The new systems, Checkpoint III, a frame grabber-based system for use with a host PC, and Checkpoint IV, a packaged system requiring no PC, are designed to meet a broad range ofCheckpoint designed forhigh-performance, multi-cameraguidance, gauging, and defect inspectionmachine vision applications.Checkpoint II features faster vision processing and expanded camera support.Checkpoint is sold primarily to end users located in North America, Japan, Europe, and Southeast Asia in a wide range of general manufacturing industries, such as manufacturers of medical devices, automotive parts, disposable consumer goods, and electronic components.
In-Sight Product Family
In early 2000, the Company entered the fast-growing market for
low-costvision sensors with the introduction of itsnew In-Sight(TM)In-Sight™ product line. Vision sensors are machine vision systems that combine a camera, vision processor, software, and input/output capability in a compact, easy-to-use package. The introduction of the In-Sight product lineproviding Cognex'sprovides Cognex’s industry-leading vision technology in an affordable, stand-alone package that does not require programming skills or a PC to deploy. The firstproduct,products, the In-Sight 2000isand In-Sight5
3000, are general-purpose vision sensors designed for part location, identification, measurement, and assembly verification tasks. Both products feature a rugged vision processing unit and separate video camera.In early 2001, the Company introduced the In-Sight 1000, a general-purpose vision sensor
designed for part location, measurement, identification, and assembly verification tasks. The Company introduced the In-Sight 3000 in late 2000 and the In-Sight 1000 in early 2001. Both products are general-purpose vision sensorswith built-inEthernetethernet networking capability for remotely managing, monitoring, and controlling vision activity. The In-Sight 1000 combines avisionvideo camera,47software, and processing in a single, compact unit. The In-Sight3000 is designed for more demanding applications1000C was introduced in mid-2001 and includes the same featuresa rugged vision processing unitas the In-Sight 1000, with the added ability to inspect andseparate vision camera.sort parts based on their color.In-Sight vision sensors
are so affordable, theycan be cost-effectively deployed in multiple points throughout the manufacturingprocess where value is being added.process. In-Sight vision sensors include a comprehensive library of Cognex vision software toolsincluding the PatFind part location tooland an easy-to-use vision spreadsheet environment enabling anyone with basic spreadsheet skills to configure a vision application.In-Sight is sold primarily to end users located in North America, Japan, Europe, and Southeast Asia in similar industries to the Checkpoint product family.
Other General-PurposeMVSD Products: Application-Specific Systems
The Company continues to offer programmable machine vision systems that run on its own proprietary hardware including the Cognex 4000 Series which plugs directly into a VME backplane, as well as the Cognex 5000 Series which plugs into a PC. APPLICATION-SPECIFIC SYSTEMS The Company also offers a variety of application-specific systems that combine Cognex hardware and software to create a solution that is tailored to the particular requirements of certain vision applications. These products are sold to OEMs and end users worldwide. A partial list of application-specific systems is as follows:In-Sight
1010(TM), introduced in late 2000, is a compact, standalone, Ethernet-ready vision sensor designed specifically for reading 2D matrix and linear bar codes on parts. In-Sight 1700(TM)1700™, introduced in early 2001, is a compact vision sensor for identifying and tracking semiconductor wafers through the manufacturing process by reading 2D matrix, alphanumeric, and bar codes on wafers.SMD 4(TM)FiberInspect™, also introduced in
mid 2000,early 2001, isCognex's next-generationa machine vision system specifically designed to automatically detect and measure scratches, cracks, and spots that form during the fiber end polishing process.CapInspect™ andLabelInpsect™, both introduced in late 2001, are application-specific tools for
guidingIn-Sight vision sensors that solve common packaging applications such as verifying that the cap is on a bottle, that the bottle is filled to the correct level, and that the label is in the correct place.In-Sight 1010™ is a compact, standalone, ethernet-ready vision sensor designed specifically for reading 2D matrix and linear bar codes on parts.
SMD 4™ guides the placement of surface mount devices onto printed circuit boards and other assemblies.
BGA
II(TM)II™ inspects ball grid array devices for missing, misplaced, or improperly formed solder balls.Fiducial Finder
II(TM)II™ locates fiducial or alignment marks on printed circuit boards for automatic printed circuit board alignment.DisplayInspect(TM) softwareDisplayInspect® inspects the small, high-resolution displays commonly found on cellular phones, pagers, medical test instruments, and other electronic devices.
iS(TM) High Performance Inspection Systems detect and classify defects in the most challenging surface inspection applications. iS systems are built from a family of hardware and software components which include proprietary line-scan cameras with motorized camera mounts, specialized lighting systems, ultra-high performance image processing boards, Unix workstations, and intelligent defect detection and classification software algorithms. iS systems can contain from one to sixty cameras and can be used to inspect webs up to 25 feet wide at speeds of up to 5,000 feet per minute. iS systems are primarily sold to producers of metals, specialized coated paper, and high-value non-woven materials. SmartView(TM)SISD Products
SmartView Product Family
SmartView® Imaging Camera Network (ICN)
, introduced in early 2000,detects, identifies, andpresentsdisplays an image of defects on products made in continuous processes. SmartView ICN provides greyscale imaging capability to visualize the defects, as well as a visual quality snapshot of the inspected web or surface. SmartView ICN is a modular and scalable system onan opena Microsoft NT platform that enables the Company to expand into more complex vision applications in the paper,nonwovens,metals, and non-woven industries.In 2001, the Company introduced three new versions of SmartView: SmartView Paper, SmartView Metals, and SmartView Non-Wovens. These systems utilize the basic SmartView ICN architecture, while adding a layer of industry-specific application knowledge. This customization reduces the amount of time that factory floor engineers have to spend to apply SmartView in their environment.
6
SmartView is sold primarily to end users located in North America, Japan, Europe, and Southeast Asia in the paper, metals,
previously only achievable with iS systems. 58 RESEARCH, DEVELOPMENT, AND ENGINEERINGplastics, and non-woven industries.Research, Development, and Engineering
The Company engages in research, development, and engineering (R, D & E) to enhance its existing products and to develop new products and functionality to meet market opportunities. In addition to internal research and development efforts, the Company intends to continue its strategy of gaining access to new technology through strategic relationships and acquisitions where appropriate. The Company considers its on-going efforts in R, D & E to be a key component of its strategy.
At December 31,
2000,2001, the Company employed195184 professionals in R, D & E, most of whom are software developers. TheCompany'sCompany’s R, D & E expenses totaled $30,094,000, $33,341,000, and $27,536,000,and $24,535,000,or 21%, 13%,18%,and20%18% of revenue, in 2001, 2000, and 1999,and 1998,respectively.MANUFACTURINGManufacturing
The
majority of the Company's machine vision systems are manufactured at its Natick, Massachusetts headquarters. The Company's NatickCompany’s MVSD manufacturing organization utilizes a turnkeymanufacturingoperation whereby the majority of component procurement, subassembly, final assembly, and initial testing are performed under agreement by third-partycontractors.contract manufacturers. After the completion of initial testing, thethird-party contractorscontract manufacturers deliver the products to theCompany to performCompany’s Natick, Massachusetts facility for final testing, quality control, andassembly.shipment to the customer. The products provided by thethird-party contractorscontract manufacturers are manufactured using specified components and assembly and test documentation created and controlled by the Company. From time to time, the Company will procure large quantities of end-of-life components for strategic purposes that will not be consumed within one year. Certain componentspurchased by the third-party contractorsare presently available only from a single source.During 2001, the Company began to transition the contract manufacturing for the majority of its MVSD products from a vendor located in Massachusetts to a vendor located in Ireland. This transition is expected to continue throughout 2002 and be completed by the end of the year.
The
Company's SmartView ICN and iS Inspection systemsCompany’s SISD products are manufactured at its Alameda, Californiafacility.facility, with the exception of the frames on which the video cameras are mounted. The manufacturingprocessesprocess at the Alameda facility consists ofsystemssystem design, configuration management and control, component procurement, and subassembly. After the completion of subassembly at the Alameda facility, the systems are delivered to the Company’s Kuopio, Finland facility where the frames are manufactured. The manufacturing process at the Kuopio facility consists of system integration with the frames, finaltest,testing, quality control, andshipment. System installation and commissioning are performed by eithershipment to theCompany or its customers.customer. Certain products are manufactured by third-partycontractorscontract manufacturers using documentation created and controlled by the Company. Certain components are presently available only from a single source.SALES AND SUPPORTSales and Service
The Company primarily markets its MVSD and SISD products through a direct sales force in North America, Japan, Europe, and Southeast Asia. At December 31,
2000,2001, theCompany'sCompany’s direct salesand serviceforce consisted of225193 professionals, including sales and application engineers. The majority of theCompany'sCompany’s salesand service personnel haveforce holds engineering or science degrees. Sales engineers call directly on targeted accounts and coordinate the activity of the application engineers. They focus on potential customers that represent possible volume purchases and long-term relationships.Opportunities that represent single-unit sales or turnkey system requirements are identified by the sales engineer and turned over to an independent system integrator that uses the Company's products. The Company sells to OEMs, many of whom have entered or are expected to enter into volume discount contracts with the Company. These contracts are typically for one year and have associated delivery schedules.Sales to
internationalcustomers based outside of the United States represented approximately 63% of revenue in 2001, compared to 69% of revenue in 2000 and1999 and 63% of revenue in 1998.1999. One customer based in Japan, Fuji America Corporation, accounted for approximately 10%, 13%, and 14%of revenue in 20001999,and1998, respectively. Information about operating segments and geographic areas, as well as foreign currency and related risk may be found13% of revenue inthe Notes to the Consolidated Financial Statements, appearing on pages 53 through 54 and pages 40 through 441999. No customer accounted for greater than 10% ofthe Annual Report to Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference.revenue in 2001. Although international sales may from time to time be subject69to federal technology export regulations, to date the Companyto datehas not suffered delays or prohibitions in sales to any of its foreign customers. Financial information about segments and geographic areas may be found in the section captioned “Notes to Consolidated Financial Statements,” appearing in Item 8 of this Annual Report on Form 10-K.7
The
Company's supportCompany’s MVSD service offerings include vision solutions consulting services, technical support, educational services, and product services. TheCompany'sCompany’s vision solutions consulting group providesfor a fee,services that range from a specific piece of programmed functionality to a completely integrated machine vision application. The technical support group consists of a team of vision experts ready to respond to questions that may arise while customers are developing or deploying a Cognex machine vision application. The educational services group offers a variety of product courses that are held at its Customer Education Center in Natick, Massachusetts, and at certain of its worldwide offices, as well as at customer facilities when required. The product services group offers a variety of software and hardware maintenance programs that provide updates on the latest software releases and new software vision tools.INTELLECTUAL PROPERTYThe Company’s SISD service offerings can be defined as either installation services or technical support. The installation services group supervises the physical installation of the hardware at the customer location, configures the software application to detect the customer’s defects, validates that the entire integrated system with the peripheral components is functioning according to the specifications, and performs operator training. The technical support group provides post-installation system, application, and service parts support.
Intellectual Property
Since the Company relies on the technical expertise, creativity, and knowledge of its personnel, it utilizes patent, trademark, copyright, and trade secret protection to safeguard its competitive position. At December 31,
2000,2001, the Company had obtained99126 patents on various innovations in the field of machine vision technology and hadover 140more than 100 pending patent applications. In addition, the Company makes use of non-disclosure agreements with customers, suppliers, employees, and consultants. The Company attempts to protect its intellectual property by restricting access to its proprietary information by a combination of technical and internal security measures. There can be no assurance, however, that any of the above measures will be adequate to protect the proprietary technology of the Company. Effective patent, trademark, copyright, and trade secret protection may be unavailable in certain foreign countries.The
Company'sCompany’s trademark and servicemark portfolio includes various registered marks, including but not limited toCognex(R)Cognex®,Checkpoint(R)VisionPro®,PatMax(R)Checkpoint®, PatMax®, PasteInspect®, andPasteInspect(R)SmartView®, as well as many common-law marks, including but not limited to,acuReader(TM)MVS-8000™,DisplayInspect(TM), PatFind(TM)CDC-100™, andSmartView(TM)In-Sight™. In addition, the Company has sought and obtained a number of trademark registrations outside of the United States. All third-party brand names,service marks,servicemarks, and trademarks referenced in this document are the property of their respective owners.The
Company'sCompany’s software products are protected by various security schemes and are primarily licensed to customers pursuant to a license agreement that restricts the use of the products to thecustomer'scustomer’s purposes, as well as imposes strict limitations on thecustomer'scustomer’s use of theCompany'sCompany’s trade secret, proprietary, and other confidential business information to which the customer may have access. The Company has made portions of the source code available to certain customers under very limited circumstances and for restricted uses. If source code is released to a customer, the customer is required by contract to maintain its confidentiality and, in general, to use the source code solely for internal purposes or for maintenance.Numerous users of the
Company'sCompany’s products have received notice of patent infringement from the Lemelson Medical, Educational, & Research Foundation, Limited Partnership("Partnership"(“Partnership”) alleging that their use of theCompany'sCompany’s products infringes certain patents transferred to the Partnership by the late Jerome H. Lemelson. Certain of these users have notified the Company that, in the event it is subsequently determined that their use of theCompany'sCompany’s products infringes any of thePartnership'sPartnership’s patents, they may seek indemnification from the Company for damages or expenses resulting from this matter. Cognex disclaims liability with respect to such indemnification requests. The Company does not believe its products infringe any valid and enforceable claims of Lemelson’s patents. Furthermore, the Partnership has stated that it is not the Company’s products that infringe Lemelson’s patents, but rather the use of those products by the Company’s customers.In July 1998, the Partnership filed a lawsuit against 26 semiconductor device manufacturers asserting infringement upon numerous Lemelson patents including certain machine vision patents. Several of the
8
defendants are users of theCompany'sCompany’s products that were purchased primarily from theCompany'sCompany’s OEM customers whose equipment incorporates such products. As a result of this action and the continuing assertions against other current and potential Cognex customers, the Company decided710to initiate action against the Partnership in order to preserve its right to sell machine vision products without the threat of legal action against the Company or its customers. Accordingly, on September 23, 1998, the Company filed a complaint against the Partnership seeking a declaration thatLemelson'sLemelson’s machine vision patents are invalid, unenforceable, and not infringed by either Cognex or by any users of Cognex products. The complaint was served on the Partnership on October 14, 1998.The Company refiled the lawsuit in Reno, Nevada on September 27, 1999 afterAfter the Judge in Massachusetts ruled that Massachusetts was not the properjurisdiction. Thejurisdiction, on September 27, 1999, the Company refiled in Reno, Nevada where several other Lemelson lawsuits are in progress and where no jurisdiction controversy exists.It will likely be at least two yearsOn January 24, 2002, the United States Court of Appeals for the Federal Circuit ruled in Cognex’s favor in an appeal that gives Cognex the right to raise the doctrine of patent prosecution laches as one of its defenses to the Partnership’s patent infringement claims. The doctrine of prosecution laches bars a patentee from enforcing a patent claim when there is an unreasonable delay in seeking the claim from the
date of this filing before a decision is rendered by the Court.Patent Office. The Companydoes not believe its products infringe any valid and enforceable claims of Lemelson's patents. Furthermore,is contending that thePartnership has stated that it is not the Company's products that infringe Lemelson's patents, but rather the use of those products by the Company's customers. On May 2, 2000, Cognex filed a complaintPartnership’s unreasonable delays in theFederal District Court in Wilmington, Delaware against National Instruments Corporation. The lawsuit includes claims of infringementprosecution of certainCognex patents, copyrights, and trademarks, as well as a claim of unfair competition. Based on the current Court ordered schedule,machine vision patent claims constitute laches. The trial is currently expected tobegincommence inapproximately one year from the dateAugust ofthis filing. On February 14, 2001, Cognex filed a complaint in the Federal District Court in Boston, Massachusetts against Electro Scientific Industries, Inc ("ESI"). The lawsuit claims that ESI infringes certain Cognex patent rights. At the date of this filing, a scheduling order has not been issued by the Court, and therefore, the trial date cannot be reasonably predicted.2002.The Company cannot predict the outcome of the Lemelson
National Instruments, ESI,Partnership or any similar litigation that may arise in the future, or the effect of such litigation on the financial results of the Company.COMPETITIONCompetition
The Company competes with other vendors of machine vision systems, the internal engineering efforts of the
Company'sCompany’s current or prospective customers, and the manufacturers of image processing systems. Any of these competitors may have greater financial and other resources than the Company. Although the Company considers itself to be one of the leading machine vision companies in the world, reliable estimates of the machine vision market and the number of competitors arealmost non-existent, primarily because of definitional confusion and a tendency toward double-counting of sales.not available.The primary competitive factors affecting the choice of a machine vision system include vendor reputation, product functionality and performance (e.g. speed, accuracy, and reliability) under real-world operating conditions, flexibility, programmability, and the availability of application support from the vendor. More recently, ease-of-use has become a competitive factor and product price has become a more significant factor with respect to simpler guidance and gauging applications. The Company competes with
thelow-cost smart camera and vision sensor solutions being introduced by various competitors on the basis of superior performance and price, rather than on price alone, through its In-Sightproducts. BACKLOGproduct line.Backlog
At December 31,
2000,2001, theCompany'sCompany’s backlog totaled$41,797,000$15,984,000, compared to$36,788,000$41,797,000 at December 31,1999.2000. Backlog reflects purchase orders for products scheduled for shipment primarily within three months. The level of backlog at any particular date is not necessarily indicative of future revenue of the Company.DeliveryCertain of the Company’s end-user products, primarily the In-Sight product line, typically ship within one week of when the order is booked. In addition, delivery schedules may be extended and orders may be canceled at any time subject to certain cancellation penalties.811 EMPLOYEESEmployees
At December 31,
2000,2001, the Company employed781697 persons, including375317 in sales, marketing, andsupportservice activities;195184 in research, development, and engineering;7072 in manufacturing and quality assurance; and141124 in information technology, finance, and administration. Of theCompany's 781Company’s 697 employees,275244 arelocatedbased outside of the United States. None of theCompany'sCompany’s employees are represented by a labor union and the Company has experienced no work stoppages. The Company believes that its employee relations are good.ITEM9
Risk Factors
Industry Concentration
In 2001, approximately 54% of the Company’s revenue was derived from customers directly or indirectly related to the semiconductor and electronics industries. This concentration has been as high as 78% in the past five years depending upon business trends in these industries. The semiconductor and electronics industries are highly cyclical and have historically experienced periodic downturns, which have often had a severe effect on demand for production equipment that incorporates the Company’s products. For the foreseeable future, the Company’s operating results will continue to be dependent upon the capital expenditures in these industries, which, in turn, are largely dependent upon the market demand for products containing integrated circuits. While the Company’s long-term strategy is designed to diversify beyond the semiconductor and electronics industries, the Company’s operating results in the foreseeable future could be significantly and adversely affected by a slowdown in either of these industries.
International Operations
In 2001, approximately 63% of the Company’s revenue was derived from customers located outside of the United States. The Company anticipates that international sales will continue to account for a significant portion of its revenue. The Company intends to continue to expand its operations outside of the United States and to enter additional international markets, which will require significant management attention and financial resources. The Company’s operations are subject to the risks inherent in international sales, including, but not limited to, various regulatory requirements, transportation delays, difficulties in staffing and managing foreign sales operations, and potentially adverse tax consequences. In addition, fluctuations in foreign currency exchange rates may render the Company’s products less competitive relative to local product offerings, or could result in significant exchange rate losses if not properly hedged. The Company is also subject to the political risks inherent in international operations and their impact on the global economy, including economic disruption from acts of terrorism, particularly in the aftermath of the terrorist attacks of September 11, 2001. Any of these factors could have a material adverse effect on the Company’s operating results.
Dependence Upon Principal Customers
In 2001, the Company’s top five customers accounted for 15% of total revenue, compared to 29% in 2000 and 30% in 1999. In recent years, the Company’s expansion into the end-user marketplace has reduced its reliance upon the revenue from any one of its larger OEM customers. Nevertheless, the loss of, or significant curtailment of purchases by, any one or more of these customers could have a material adverse effect on the Company’s operating results.
Dependence Upon Key Suppliers
At present, the majority of the Company’s proprietary MVSD vision hardware is manufactured by third-party contractors. The Company’s reliance on outside contractors involves several risks including limited control over quality and delivery schedules. The failure by one or more of these contract manufacturers to deliver quality product in a timely manner could significantly and adversely affect the Company’s operating results. In addition, a variety of components used in the Company’s products are only available from a single source. The announcement by a single-source supplier of a last-time component buy could result in a significant amount of strategic inventory purchases, that in turn, could lead to an increased risk of inventory obsolescence. An interruption in, termination of, or material change in the purchase terms of any single-source components could have a material adverse effect on the Company’s operating results.
Dependence Upon Key Personnel
The Company is highly dependent upon the management and leadership of Robert J. Shillman, President, Chief Executive Officer, and Chairman of the Board of Directors of the Company, as well as other members of the Company’s senior management team, many of whom would be difficult to replace. Although
10
the Company has retained other experienced and qualified senior managers, the loss of certain key personnel could have a material adverse effect on the Company. The Company’s continued growth and success also depends upon its ability to attract and retain skilled employees and on the ability of its officers and key employees to effectively manage the growth of the Company through the implementation of appropriate management information systems and internal controls.Forecast Accuracy
In recent years, the Company has expanded its presence in the end-user marketplace, which accounted for approximately 56% of the Company’s revenue in 2001, compared to 37% in 2000 and 39% in 1999. The Company’s end-user business typically operates with a relatively short backlog and production plans are based on internal forecasts of customer demand. Due to these factors, the Company has in the past, and may again in the future, fail to accurately forecast demand, in terms of both volume and configuration for either our legacy or next-generation products. This has led to, and may again in the future lead to, an increased risk of inventory obsolescence.
Technological Change
The market for the Company’s products is characterized by rapidly changing technology. Accordingly, the Company believes that its future success will depend upon its ability to develop or acquire new products with improved price/performance and introduce them to the marketplace in a timely manner. There can be no assurance that the Company will be able to introduce and market new products successfully and respond effectively to technological changes or new product introductions by competitors. The inability to keep pace with the rapid rate of technological change in the high-technology marketplace could have a material adverse effect on the Company’s operating results.
Intellectual Property
The Company relies heavily on its proprietary software technology and hardware designs, as well as the technical expertise, creativity, and knowledge of its personnel. Although the Company uses a variety of methods to protect its intellectual property, it relies most heavily on patent, trademark, copyright, and trade secret protection, as well as non-disclosure agreements with customers, suppliers, employees, and consultants. The Company attempts to protect its intellectual property by restricting access to its proprietary information by a combination of technical and internal security measures. There can be no assurance, however, that any of the above measures will be adequate to protect the proprietary technology of the Company, that any patents issued to the Company will not be challenged, invalidated, or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. Any such adverse circumstances could have a material effect on the Company’s operating results. Readers should refer to the section captioned “Intellectual Property,” appearing in Item I of this Annual Report on Form 10-K.
Competition
The Company competes with other vendors of machine vision systems, the internal engineering efforts of the Company’s current or prospective customers, and the manufacturers of image processing systems. Any of these competitors may have greater financial and other resources than the Company. In recent years, ease-of-use and product price have become significant competitive factors in the end-user marketplace. The Company competes with low-cost smart camera and vision sensor solutions being introduced by various competitors on the basis of superior performance and price, rather than on price alone, through its In-Sight product line. There can be no assurance that the Company will be able to compete successfully in the future or that the Company will not be required to incur significant investment costs in connection with its research and development, marketing, and service activities. In addition, competitive pressures could lead to price erosion that could materially and adversely effect the Company’s operating results. Readers should refer to the section captioned “Competition,” appearing in Item 1 of this Annual Report on Form 10-K.
11
Acquisitions
The Company’s business strategy includes selective expansion into other machine vision applications through the acquisition of businesses and technologies. Since 1995, the Company has completed seven business acquisitions. The Company plans to continue to seek out opportunities to expand its product line, customer base, and technical talent through acquisitions in the machine vision industry. Acquisitions involve numerous risks, including, but not limited to, diversion of management’s attention from other operational matters, the inability to realize expected synergies resulting from the acquisition, failure to commercialize purchased technology, and the impairment of acquired intangible assets resulting from technological obsolescence or lower-than-expected cash flows from the acquired assets. Acquisitions are inherently risky and the inability to effectively manage these risks could have a material adverse effect on the Company’s operating results.
Stock Price Volatility
The price of the Company’s common stock has historically experienced significant volatility due to fluctuations in the Company’s revenue and earnings, changes in the market’s expectations for the Company’s growth, overall equity market conditions, conditions relating to the market for technology stocks, general economic conditions, and other factors unrelated to the Company’s operations. The stock markets have experienced extreme price volatility in recent years. This volatility has had a substantial effect on the market prices of securities issued by many technology companies, often for reasons unrelated to the operating results of the specific company.
Item 2:
PROPERTIESPropertiesIn 1994, the Company purchased and renovated a 100,000 square-foot building located in Natick, Massachusetts that serves as
it'sits corporate headquarters. In 1997, the Company completed construction of a 50,000 square-foot addition to this building.In 1995, the Company purchased an 83,000 square-foot office building adjacent to its corporate headquarters. The building is currently largely occupied with tenants who have lease agreements that expire at various dates through
2002,2003, at which point the Company may take occupancy of the building. The Company uses asmallportion of the space for storage of its inventory.In 1997, the Company purchased a three and one-half acre parcel of land situated on Vision Drive, adjacent to the
Company'sCompany’s corporate headquarters. This land isanticipated to be usedbeing held for future expansion.ITEMItem 3:
LEGAL PROCEEDINGSLegal ProceedingsTo the
Company'sCompany’s knowledge, there are no pending legal proceedings, other than as described in"Business - Patents and Licenses,"the section captioned “Intellectual Property,” appearing in Item I of this Annual Report on Form 10-K, which are material to the Company, to which it is a party, or to which any of its property is subject. From time to time, however, the Company may be subject to various claims and lawsuits by customers and competitors arising in thenormalordinary course of business, includingsuitslawsuits charging patent infringement.ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 4: Submission of Matters to a Vote of Security Holders There were no matters submitted during the fourth quarter of the year ended December 31,
20002001 to a vote of security holders through solicitation of proxies or otherwise.912
ITEM 4A: EXECUTIVE OFFICERS AND OTHER MEMBERS OF THE MANAGEMENT TEAM OF THE REGISTRANT
Item 4A: Executive Officers and Other Members of the Management Team of the Registrant The following table sets forth the names, ages, and titles of the
Company'sCompany’s executive officers at December 31,2000:2001:
NAME AGE TITLE - ---- --- -----Name Age Title Robert J. Shillman 5455 President, Chief Executive Officer, and Chairman of theBoard of DirectorsPatrick Alias 5556 Executive Vice President Worldwide SalesandMarketingDirectorJames Hoffmaster 50 Chief Operating Officer Messrs. Shillman and Alias have been employed by the Company in their present or other capacities for no less than the past five years.
Mr. Hoffmaster joined the Company in 2001. Prior to joining the Company, Mr. Hoffmaster was the Chief Executive Officer of Fibersense, a Massachusetts-based company specializing in the application of fiber optic technology to gyroscopes and other sensors. Prior to that, Mr. Hoffmaster served as President of Fisher-Rosemount Systems, a division of Emerson Electric. He holds a Masters of Computer and Information Science degree and a Bachelor of Arts degree in Economics from Cleveland State University.
Executive officers are elected annually by the Board of Directors. There are no family relationships among the directors and the executive officers of the Company.
OTHER MEMBERS OF THE MANAGEMENT TEAMOther members of the senior management team include the following individuals:
NAME AGE TITLE - ---- --- -----Name Age Title Markku Jaaskelainen 46 Corporate47 Senior Vice President and General Manager, SISD Marilyn Matz 4748 Senior Vice President - Software Developmentof Engineering, MVSDE. John McGarry 4445 Senior Vice President and General Manager, In-Sight Products Group Richard Morin 5152 Senior Vice President of Finance and Administration, Chief Financial Officer, and Treasurer William Silver 47Kris Nelson 54 Senior Vice President of Sales, North America William Silver 48 Senior Vice President of R&D and Chief Technology Officer, MVSD Justin Testa 4849 Senior Vice President -of Marketing, MVSDMessrs. McGarry, Nelson, Silver,
McGarry,and Testa and Ms. Matz have been employed by the Company in their present or other capacities for no less than the past five years.Mr. Jaaskelainen joined the Company in 1999. Prior to joining the Company, Mr. Jaaskelainen served as Vice President of Systems Strategy for Honeywell-Measurex Corporation, where he was responsible for overseeing and coordinating all new product development. He holds a Master’s degree and Ph.D. in Physics from the University of Jyvaskyla, Finland.
Mr. Morin joined the Company in 1999 after ten years as Chief Financial Officer for C&K Components, Inc., an international manufacturer of electronic components and security systems. Mr. Morin also served as Corporate Controller and Vice President of Finance for the Jamesbury Corporation.
Mr. MorinHe holds a Bachelor of Arts degree in Economics and Accounting from The College of the Holy Cross and is a Certified Public Accountant.1013
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Certain information
Item 5: Market for Registrant’s Common Equity and Related Stockholder Matters The Company’s common stock is traded on The NASDAQ Stock Market, under the symbol CGNX. As of February 21, 2002, there were approximately 15,000 registered and non-registered holders of the Company’s common stock.
The Company has never declared or paid cash dividends on its common stock. The Company currently intends to retain all of its earnings to finance the development and expansion of its business, and therefore, does not intend to declare or pay cash dividends on its common stock in the foreseeable future. Any future declaration and payment of cash dividends will be subject to the discretion of the Company’s Board of Directors, will be subject to applicable law, and will depend upon the Company’s results of operations, financial condition, contractual limitations, cash requirements, future prospects, and other factors deemed relevant by the Company’s Board of Directors.
The high and low sales prices of the Company’s common stock as reported by the NASDAQ Stock Market, for each quarter in 2001 and 2000 are as follows:
First Second Third Fourth High 28.1875 34.4000 34.2000 27.1400 Low 18.8125 21.3125 19.6000 17.6000 High 73.1250 67.5000 56.1875 40.0000 Low 34.6875 46.7500 33.0000 16.1250 14
Item 6: Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with
respectItem 7 of this Annual Report on Form 10-K.
Year Ended December 31, 2001 2000 1999 1998 1997 (In thousands, except per share amounts) Statement of Operations Data: Revenue $ 140,729 $ 250,726 $ 152,125 $ 121,844 $ 155,340 Cost of revenue 62,345 63,820 45,221 37,296 42,273 Gross margin 78,384 186,906 106,904 84,548 113,067 Research, development, and engineering expenses 30,094 33,341 27,536 24,535 22,311 Selling, general, and administrative expenses 61,590 61,915 43,523 37,973 35,810 Amortization of goodwill 3,108 1,964 265 127 170 Charge for acquired in-process technology — — — 2,100 3,115 Charge for intangible asset impairment 10,932 — — — — Operating income (loss) (27,340 ) 89,686 35,580 19,813 51,661 Investment and other income 11,669 10,532 7,300 7,489 6,665 Income (loss) before taxes (15,671 ) 100,218 42,880 27,302 58,326 Income tax provision (benefit) (4,544 ) 32,070 12,435 7,099 17,790 Net income (loss) $ (11,127 ) $ 68,148 $ 30,445 $ 20,203 $ 40,536 Basic net income (loss) per share $ (0.25 ) $ 1.58 $ 0.74 $ 0.49 $ 0.98 Diluted net income (loss) per share $ (0.25 ) $ 1.49 $ 0.69 $ 0.47 $ 0.91 Basic weighted-average common shares outstanding 43,639 43,043 40,932 40,978 41,322 Diluted weighted-average common shares outstanding 43,639 45,698 43,986 43,203 44,702
December 31, 2001 2000 1999 1998 1997 (In thousands) Balance Sheet Data: Working capital $ 143,712 $ 167,913 $ 126,298 $ 101,971 $ 108,970 Total assets 406,904 436,141 314,822 247,928 261,840 Long-term debt — — — — — Stockholders’ equity 378,044 383,949 276,624 222,875 236,142
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to
this itemmake estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its15
estimates, including those related to bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, excess component orders, cancellation costs, long-term contracts, litigation, and other contingencies. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant estimates and judgments used in the preparation of its consolidated financial statements.The Company writes down its inventory for estimated excess and obsolescence equal to the difference between the cost of inventory and the estimated fair value based upon assumptions about future demand, product transitions, and market conditions. If actual results are less favorable than those assumptions, additional inventory write-downs may be
foundrequired.The Company holds equity investments in publicly-traded Japanese companies with volatile stock prices. These companies are established market leaders in the
section captioned "Selected Quarterly Financial Data," appearingsemiconductor and electronics industries, which are highly cyclical industries and have historically experienced extended periodic downturns. The Company also maintains other investments for which the risks related to changes in market or economic conditions vary. The Company evaluates its investments for potential impairment when an investment has experienced a decline in fair value. If the decline in fair value is determined to be other-than-temporary, an impairment charge would be recorded in current operations. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby requiring an impairment charge in the future.The Company has long-term assets including property, plant, and equipment, as well as acquired goodwill and other intangible assets. These assets are susceptible to shortened estimated useful lives and changes in their fair values due to changes in their use, market or economic changes, or other events or circumstances. The Company evaluates the recoverability of its long-term assets based upon new events and circumstances or significant declines in the fair value of the assets. If market conditions or other events occur which would require a significant reduction of the estimated useful lives of these assets or result in a significant decrease in fair value below their carrying amounts, an adjustment to the lives or carrying amounts would result in a charge to income in the period of determination.
The Company evaluates the realizability of its deferred tax assets and has determined that it is more likely than not that deferred tax assets will be realized. While the Company has considered historical taxable income in assessing the realizability of deferred tax assets, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would result in a charge to income in the period such determination was made. Additionally, the Company has taken certain tax positions and is subject to audits by related tax authorities, which may result in future charges or credits.
The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers and third-party contract manufacturers, the Company’s warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, or service delivery costs differ from management’s estimates, revisions to the estimated warranty obligation would be required.
Summary
The Company’s results in 2001 were impacted by a slowdown in capital spending by manufacturers worldwide, resulting in a 44% decrease in revenue from 2000. Sales to original equipment manufacturer (OEM) customers, who incorporate Cognex machine vision systems into the capital equipment they manufacture and sell to their customers, primarily in the semiconductor and electronics industries, decreased
16
61% from 2000. Likewise, sales to end-user customers, who purchase Cognex machine vision systems and install them directly onpage 60,their production lines, decreased 16% from the prior year.Throughout the year, the Company implemented a number of cost-containment measures to more closely align expenses to the lower level of customer demand, while also maintaining its commitment to new product development and end-user market penetration. The Company’s financial position remained strong at December 31, 2001, with $407 million in total assets and $378 million in stockholders’ equity. Working capital totaled $144 million, with the majority of this balance comprised of cash, cash equivalents, and investments.
The following table sets forth certain consolidated financial data as a percentage of revenue:
Year ended December 31, 2001 2000 1999 Revenue 100 % 100 % 100 % Cost of revenue 44 25 30 Gross margin 56 75 70 Research, development, and engineering expenses 21 13 18 Selling, general, and administrative expenses 44 25 29 Amortization of goodwill 2 1 — Charge for intangible asset impairment 8 — — Operating income (loss) (19 ) 36 23 Investment and other income 8 4 5 Income (loss) before taxes (11 ) 40 28 Income tax provision (benefit) (3 ) 13 8 Net income (loss) (8 )% 27 % 20 % Results of Operations
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
During 2001, the Company operated in two reportable segments: the Modular Vision Systems Division (MVSD) and the
section captioned "Company Information," appearingSurface Inspection 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.Inventory and Intangible Asset Impairment Charges
Throughout 2001, the Company’s results were negatively impacted by the worldwide slowdown in capital equipment spending by manufacturers in the semiconductor and electronics industries, as well as the weakened global economy. During the fourth quarter of 2001, a number of factors indicated that the business slowdown would be both longer and more severe than the Company had previously anticipated, and the Company’s revenue plan for 2002 was lowered accordingly. Most notable among these factors were the continued decline in order rates across a variety of industries and product lines, as well as information obtained during the fourth quarter from the Company’s OEM customers regarding their high inventory positions and low consumption rates of Cognex products. These factors indicated that the Company’s OEM revenue would be significantly lower than expected for the next several quarters. Additionally, when a business recovery does occur, these customers will most likely transition from their current inventory of Cognex legacy products to newer Cognex platforms, as they leverage their engineering resources during the business slowdown to develop next-generation capital equipment. These OEM product transitions, as well as the lower level of demand principally from OEM customers, resulted in a $16,300,000 charge for excess inventories and purchase
17
commitments in the fourth quarter of 2001 that is included in “Cost of product revenue” onpage 61the Consolidated Statements of Operations.Also as a result of the
Annual Reportsignificant adverse change in the business outlook determined in the fourth quarter of 2001 described above, the Company evaluated the possible impairment of its intangible assets in accordance with Statement of Financial Accounting Standard (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets toStockholdersbe Disposed Of.” These analyses resulted in impairment charges based on the difference between the carrying amount and the estimated fair value of certain acquisition-related intangible assets. The fair value was based on discounting estimated future cash flows for assets grouped at the lowest level for which there were identifiable cash flows at a discount rate commensurate with the risks involved. The resulting analyses yielded a $10,932,000 impairment charge related to goodwill arising primarily from the acquisitions in 2000 of the machine vision businesses of Komatsu Ltd. and Honeywell International Inc. The analyses also resulted in a $315,000 charge, included in “Cost of product revenue,” related to the impairment of complete technology acquired primarily from Komatsu Ltd. These charges impacted both the MVSD and SISD segments.Revenue
Total revenue for the year ended December 31, 2001 decreased 44% to $140,729,000 from $250,726,000 for the year ended December 31, 2000. During 2001, the Company’s results were negatively impacted by a worldwide slowdown in capital spending by manufacturers in the semiconductor and electronics industries. Sales to OEM customers, most of whom make capital equipment used by manufacturers in these industries, decreased $95,439,000, or 61%, from the prior year. Sales to end-user customers also decreased from the prior year by $14,558,000, or 16%, primarily due to lower demand from customers who make electronic products. Although end-user sales decreased in total from 2000, revenue from customers outside the semiconductor and electronics industries, such as the automotive and paper industries, increased $10,219,000, or 20%, from the prior year due principally to higher sales of the Company’s In-Sight and SmartView products. Both product lines were introduced in early 2000 and are targeted to the end-user market. Sales to end-user customers represented 56% of total revenue in 2001 compared to 37% in 2000. Geographically, revenue decreased from the prior year in all 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 year ended December 31, 2001 decreased 47% to $119,288,000 from $227,079,000 for the year ended December 31, 2000. The decrease in product revenue was primarily due to a lower volume of machine vision systems sold to customers in the semiconductor and electronics industries. Service revenue, which is derived from the sale of maintenance and support, education, consulting, and installation services, decreased 9% to $21,441,000 from $23,647,000 due principally to lower demand for consulting services. Many of the Company’s products that were sold during 2000 included bundled maintenance and support programs for which a portion of the revenue was recognized in 2001 over the program period. As a result, service revenue did not decrease as dramatically as product revenue and it increased as a percentage of total revenue. Service revenue accounted for 15% of total revenue in 2001 compared to 9% in 2000.
MVSD revenue for the year ended December 31, 2001 decreased 49% to $117,074,000 from $231,471,000 for the year ended December 31, 2000. The decrease in MVSD revenue was primarily due to a lower volume of systems sold to customers in the semiconductor and electronics industries. SISD revenue increased 23% to $23,655,000 from $19,255,000 due principally to a higher volume of SmartView systems sold to customers in surface inspection industries, such as the paper and metals industries. SISD revenue represented 17% of total revenue in 2001 compared to 8% in 2000.
Gross Margin
Total gross margin as a percentage of revenue was 56% for 2001 compared to 75% for 2000. The inventory and intangible asset impairment charges recorded in “Cost of product revenue” of $16,615,000 accounted for twelve percentage points of the decrease in the gross margin from 2000. The remaining seven percentage-point
18
decrease was primarily due to the impact of the lower sales volume over a base of fixed manufacturing costs, as well as a greater percentage of total revenue from the sale of services and surface inspection systems, both of which carry lower margins than the sale of modular vision systems.Product gross margin as a percentage of revenue, excluding the inventory and intangible asset impairment charges, was 72% for 2001 compared to 78% for 2000. The decrease in product margin was primarily due to unfavorable absorption of manufacturing overhead due to a decreased volume of sales and the shift in product mix to lower-margin surface inspection systems. Service gross margin as a percentage of revenue was 43% for 2001 compared to 40% for 2000. The increase in service margin was due principally to lower service costs resulting from the cost-containment measures implemented in 2001 to more closely align expenses to the lower level of customer demand. These measures included salary freezes and reductions, the elimination of all company bonuses, mandatory shutdowns, a reduction in discretionary spending, and a reduction in workforce.
MVSD gross margin as a percentage of revenue, excluding the inventory and intangible asset impairment charges, was 73% for 2001 compared to 77% for 2000. The decrease in MVSD margin was primarily due to the impact of the lower sales volume over a base of fixed manufacturing costs. SISD gross margin as a percentage of revenue was 42% for 2001 compared to 44% for 2000. 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 for the year ended December 31, 2001 decreased 10% to $30,094,000 from $33,341,000 for the year ended December 31, 2000. MVSD research, development, and engineering expenses decreased $3,163,000, or 10%, from the prior year and SISD research, development, and engineering expenses decreased $84,000, or 3%, from 2000. The decrease in MVSD and SISD expenses was primarily due to the cost-containment measures implemented in 2001, as previously discussed.
Selling, general, and administrative expenses for the year ended December 31, 2001 decreased 1% to $61,590,000 from $61,915,000 for the year ended December 31, 2000. MVSD selling, general, and administrative expenses decreased $2,500,000, or 5%, from the prior year, while SISD selling, general, and administrative expenses increased $406,000, or 7%, from 2000. Corporate expenses that are not allocated to a division increased $1,769,000, or 21%, from the prior year. The decrease in MVSD expenses was primarily due to the cost-containment measures implemented in 2001, as previously discussed. The increase in SISD expenses was due principally to higher sales and marketing costs required to grow the worldwide sales organization and market the Company’s SmartView product line, which was introduced in 2000. The increase in unallocated corporate expenses was primarily due to higher legal costs associated with patent infringement lawsuits initiated by the Company to protect its intellectual property.
Amortization of goodwill for the year ended December 31, 2001 totaled $3,108,000 compared to $1,964,000 for the year ended December 31, 2000, representing an increase of $1,144,000. Goodwill amortization at MVSD increased $499,000 due to the full impact in 2001 of the goodwill arising from the Komatsu Ltd. and Image Industries Ltd. acquisitions in early 2000. Goodwill amortization at SISD increased $645,000 due to the full impact in 2001 of the goodwill arising from the Honeywell International Inc. acquisition in late 2000.
Investment and Other Income
Investment income for the year ended December 31, 2001 increased 16% to $10,980,000 from $9,494,000 for the year ended December 31, 2000. The increase in investment income was due primarily to a higher average invested balance in 2001.
Other income for the year ended December 31, 2001 decreased 34% to $689,000 from $1,038,000 for the year ended December 31, 2000. Other income consists primarily of rental income, net of related expenses, from leasing the building adjacent to the Company’s corporate headquarters. A portion of the Company’s space available for lease was unoccupied in 2001.
19
Income Taxes
The Company’s effective tax rate for 2001 was a benefit of 29% compared to a provision of 32% in 2000. The benefit reflects the Company’s significant tax-exempt investment income, future reductions in taxes payable relating to net operating loss carryforwards in various jurisdictions, continued investments in the Company’s foreign operations, and certain of the goodwill impairment charges recognized during the year, which are not deductible for tax purposes.
Outlook
The Company anticipates that its results for the first quarter of 2002 will continue to be negatively impacted by the worldwide slowdown in capital spending by manufacturers in the semiconductor and electronics industries, as well as the uncertain economic conditions that exist today. Accordingly, the Company anticipates that revenue for the first quarter of 2002 will be in the range of $21,000,000 to $23,000,000, compared to $25,170,000 reported in the fourth quarter of 2001. The Company has limited visibility to revenue levels beyond the first quarter of 2002 due to the increasing level of end-user business and shortened order lead times.
During 2001, the Company implemented a number of cost-containment measures to more closely align expenses to the lower level of customer demand. The Company does not anticipate the savings from these measures to fully compensate for the substantial decline in revenue, and therefore, expects to report a loss in the range of $0.05 to $0.08 per diluted share in the first quarter of 2002. If business continues at the current order rate, it is likely that the Company will report a loss in each quarter of 2002, and therefore, for the full year as well.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue
Total revenue for the year ended December 31, 2000 increased 65% to $250,726,000 from $152,125,000 for the year ended December 31, 1999. The increase in revenue was due to higher demand from both the Company’s OEM and end-user customers. Sales to OEM customers increased $63,699,000, or 68%, from the prior year due to a higher volume of machine vision systems sold to the Company’s core OEM customers who make capital equipment for the semiconductor and electronics industries. Sales to OEM customers represented 63% of total revenue in 2000 compared to 61% of total revenue in 1999. Sales to end-user customers increased $34,902,000, or 59%, from the prior year due largely to the introduction of the In-Sight and SmartView product lines early in 2000, which are both targeted toward the end-user market.
Geographically, revenue increased in all of the Company’s regions from 1999. Sales to customers in Japan and North America increased $49,697,000, or 74%, and $30,463,000, or 64%, respectively, primarily due to the increase in sales to the Company’s OEM customers, most of whom are located in these regions. Sales to customers in Europe increased $15,836,000, or 48%, due largely to higher demand from European manufacturers of cellular telephones.
Product revenue for the year ended December 31, 2000 increased 67% to $227,079,000 from $136,278,000 for the year ended December 31, 1999. 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
Exhibit 13 hereto,derived from the sale of maintenance and support, education, consulting, and installation services, increased 49% to $23,647,000 from $15,847,000, driven principally by the increased product sales which contain bundled maintenance and support programs. Service revenue accounted for 9% of total revenue in 2000 compared to 10% of total revenue in 1999.MVSD revenue for the year ended December 31, 2000 increased 64% to $231,471,000 from $141,518,000 for the year ended December 31, 1999. The increase in MVSD revenue was primarily due to a higher volume of systems sold to customers in the semiconductor and electronics industries, as well as the introduction of the In-Sight product line. SISD revenue increased 82% to $19,255,000 from $10,607,000 due principally to the introduction of the SmartView product line.
20
Gross margin
Total gross margin as a percentage of revenue was 75% for 2000 compared to 70% for 1999. The increase in the gross margin was due primarily to manufacturing efficiencies that resulted from increased product sales without a significant increase in manufacturing overhead, as well as improved gross margins on the Company’s surface inspection systems with the introduction of the SmartView product line.
Product gross margin as a percentage of revenue was 78% for 2000 compared to 75% for 1999. The increase in product margin was primarily due to favorable absorption of manufacturing overhead and improved margins on the Company’s surface inspection systems. Service gross margin as a percentage of revenue was 40% for 2000 compared to 31% in 1999. The increase in service margin was due principally to service revenue increasing at a faster rate than service costs.
MVSD gross margin as a percentage of revenue was 77% for 2000 compared to 74% for 1999. The increase in MVSD margin was due primarily to manufacturing efficiencies that resulted from increased product sales without a significant increase in manufacturing overhead. SISD gross margin as a percentage of revenue was 44% for 2000 compared to 16% for 1999. The increase in SISD margin was due principally to the introduction of the SmartView product line, which carries higher margins than the legacy surface inspection systems.
Operating Expenses
Research, development, and engineering expenses for the year ended December 31, 2000 increased 21% to $33,341,000 from $27,536,000 for the year ended December 31, 1999. MVSD research, development, and engineering expenses increased $6,656,000, or 28%, from the prior year, while SISD research, development, and engineering expenses decreased $851,000, or 25%, from 1999. The increase in MVSD expenses was primarily due to higher personnel-related costs to support the Company’s continued investment in the research and development of new and existing products. Included in the higher personnel-related costs are expenses associated with additional employees from the acquisitions completed during the year. The decrease in SISD expenses was due principally to product development costs incurred in 1999 related to the launch of the SmartView product line early in 2000.
Selling, general, and administrative expenses for the year ended December 31, 2000 increased 42% to $61,915,000 from $43,523,000 for the year ended December 31, 1999. MVSD selling, general, and administrative expenses increased $16,468,000, or 53%, from the prior year and SISD selling, general, and administrative expenses increased $571,000, or 11%, from 1999. Corporate expenses that are not allocated to a division increased $1,353,000, or 19%, from the prior year. The increase in MVSD and SISD expenses was primarily due to higher personnel-related costs to support the Company’s expanding worldwide operations and to grow the Company’s end-user business, as well as increased marketing costs associated with the introduction of the In-Sight and SmartView product lines. Included in the higher personnel-related costs are expenses associated with additional employees from the acquisitions completed during the year. The increase in unallocated corporate expenses was due principally to higher legal costs associated with patent infringement lawsuits initiated by the Company to protect its intellectual property.
Amortization of goodwill for the year ended December 31, 2000 totaled $1,964,000 compared to $265,000 for the year ended December 31, 1999, representing an increase of $1,699,000. Goodwill amortization at MVSD increased $1,376,000 due to additional goodwill arising from the Komatsu Ltd. and Image Industries Ltd. acquisitions that were completed in March and April of 2000. Goodwill amortization at SISD increased $323,000 due to additional goodwill arising from the Honeywell International Inc. acquisition that was completed in September of 2000.
Investment and Other Income
Investment income for the year ended December 31, 2000 increased 44% to $9,494,000 from $6,572,000 for the year ended December 31, 1999. The increase in investment income was due primarily to higher average
21
interest rates on the Company’s portfolio of investments, which consists principally of debt securities, as well as a higher average invested balance in 2000.Other income for the year ended December 31, 2000 totaled $1,038,000 compared to $728,000 for the year ended December 31, 1999. Other income consists primarily of rental income, net of related expenses, from leasing the building adjacent to the Company’s corporate headquarters.
Income Taxes
The Company’s effective tax rate for 2000 was 32% compared to 29% for 1999. The increase in the effective tax rate was due primarily to the higher operating income in 2000, increased investments in the Company’s foreign operations, and the diminishing effect of tax-free investments.
Liquidity and Capital Resources
The Company’s cash requirements during the year ended December 31, 2001 were met through cash generated from operations along with existing cash, cash equivalents, and investments balances. Cash, cash equivalents, and investments at December 31, 2001 totaled $292,715,000 and increased $14,975,000 during the year primarily as a result of cash generated from operations and the proceeds from the issuance of common stock under stock option and stock purchase plans, partially offset by capital expenditures, which totaled $4,455,000 and consisted principally of expenditures for computer hardware and software.
On March 31, 2000, the Company acquired selected assets of the machine vision business of Komatsu Ltd. for $11,200,000 in cash, with the potential for an additional cash payment in 2002 of up to $8,000,000 depending upon certain performance criteria. Although the measurement period for the performance criteria does not end until March 2002, based upon information available as of December 31, 2001, the Company does not believe the performance criteria will be met, and therefore, does not anticipate making any additional payments in 2002.
On April 20, 2000, the Company acquired all of the outstanding shares of Image Industries, Ltd. for $2,706,000. The purchase price included $1,754,000 in cash payments, $341,000 of which, at December 31, 2001, remained to be paid in 2002.
On September 30, 2000, the Company acquired selected assets of the web inspection business of Honeywell International Inc. for $8,400,000 in cash. The Company paid an additional $1,600,000 at the closing that is contingent upon the achievement of certain performance criteria in 2001. There is the potential for an additional cash payment of up to $1,600,000 in 2002, also depending upon certain performance criteria. The measurement period for the performance criteria ended December 31, 2001, and in 2002 the Company expects to make no further payments and to receive a refund of the $1,600,000 paid at closing.
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 of up to $25,000,000 over a ten-year period, of which $7,125,000 had been invested as of December 31, 2001.
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. As of December 31, 2001, the Company had not repurchased any shares under this program.
The Company believes that its existing cash, cash equivalents, and investments balances will be sufficient to meet its planned operating and investing activities in 2002, which consist primarily of working capital and capital expenditure requirements, as well as any strategic initiatives in 2002, including its stock repurchase program and potential business or asset acquisitions.
New Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations.” SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase
22
method for which the date of acquisition is after June 30, 2001. This standard requires that all business combinations be accounted for under the purchase method and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. The Company adopted SFAS No. 141 on July 1, 2001 and it did not have a material impact on the Company’s financial position and results of operations.In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. This standard requires, among other things, the cessation of the amortization of goodwill. In addition, SFAS No. 142 includes provisions for the reclassification of certain existing intangible assets as goodwill, the reclassification of certain existing intangible assets out of previously reported goodwill, the reassessment of the useful lives of existing intangible assets, and the identification of reporting units for the purpose of assessing potential future impairments of goodwill. This standard also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company adopted SFAS No. 142 on January 1, 2002 and is
incorporated hereinrequired to complete the transition impairment test no later than June 30, 2002. The Company is currently assessing the impact of this new statement on its financial position and results of operations, but does not expect it to have a material impact upon adoption. Effective January 1, 2002, the Company will cease the amortization of goodwill.In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” This standard requires that long-lived assets that are to be disposed of by
reference.sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company adopted SFAS No. 144 on January 1, 2002 and it did not have a material impact on its financial position 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, which are prefaced with words such as “expects,” “anticipates,” “believes,” “projects,” “intends,” “plans,” and similar words and other statements of a similar sense, are forward-looking statements. These statements are based on the Company’s current expectations and estimates 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, like any other forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) the cyclicality of the semiconductor and electronics industries; (2) the Company’s continued ability to achieve significant international revenue; (3) the loss of, or a significant curtailment of purchases by, any one or more principal customers; (4) the reliance upon certain sole source suppliers to manufacture or deliver critical components of the Company’s products; (5) the inability to attract or retain skilled employees; (6) the inability to forecast customer demand accurately; (7) the technological obsolescence of current products and the inability to develop new products; (8) the inability to protect the Company’s proprietary technology and intellectual property; (9) the inability to respond to competitive technology and pricing pressures; and (10) the inability to achieve expected results from acquisitions. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Further discussions of risk factors are also available in Item 1 of this Annual Report on Form 10-K. The Company wishes to caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk The Company’s investment portfolio includes debt securities of various issuers, types, and maturities. Debt securities purchased with original maturities of three months or less are classified as cash equivalents.
23
Debt securities with original maturities greater than three months are stated at amortized cost, which approximates fair value, and are categorized as available-for-sale. Given the short maturities and investment-grade quality of the portfolio of debt securities at December 31, 2001, a sharp rise in interest rates should not have a material adverse impact on the fair value of the Company’s investment portfolio. As a result, the Company does not currently hedge these interest rate exposures.The following table (dollars in thousands) presents hypothetical changes in fair value in the Company’s financial instruments at December 31, 2001 that are sensitive to changes in interest rates. The modeling technique measures the change in fair value arising from selected potential changes in interest rates. Movements in interest rates of plus or minus 50 basis points (BP) and 100 BP reflect immediate hypothetical shifts in the fair value of these investments. Fair value represents the market value of the principal plus accrued interest and dividends of certain interest-rate-sensitive securities at December 31, 2001.
Valuation of securities Valuation of securities given an interest rate given an interest rate decrease No change increase in interest Type of security (100 BP) (50 BP) rates 100 BP 50 BP Municipal obligations with contractual maturities no greater than three years $ 268,282 $ 266,623 $ 264,968 $ 261,669 $ 263,317 A 50 BP move in the Federal Funds Rate has occurred in 12 of the last 44 quarters. There has not been a 100 BP movement in the Federal Funds Rate in any of the last 44 quarters.
The Company’s investment portfolio includes equity securities in publicly-traded Japanese companies with volatile stock prices. These companies are established market leaders in the semiconductor and electronics industries, which are highly cyclical industries and have historically experienced extended periodic downturns. It is the Company’s intention to hold these securities on a long-term basis consistent with its long-term commitment to the Japanese market. Equity securities are stated at fair value based upon prices quoted on public stock exchanges and are categorized as available-for-sale. Temporary changes in unrealized gains or losses on equity securities, net of tax, are recorded as other comprehensive income (loss). The Company evaluates its investments for potential impairment when an investment has experienced a decline in fair value. If the decline in fair value is determined to be other-than-temporary, an impairment charge would be recorded in current operations. At December 31, 2001, the Company’s equity securities had a fair value of $5,687,000 and an unrealized loss of $6,774,000. As of March 8, 2002, the unrealized loss on these securities had been reduced to $4,824,000. The Company has determined that this unrealized loss is temporary because these stock price movements represent short-term trading fluctuations due to the cyclical nature of the semiconductor and electronics industries, which the Company believes are currently recovering from a downturn, and not a fundamental change in the underlying companies.
The unrealized gain (loss) recorded as other comprehensive income (loss) is made up of two components: the yen strengthening (weakening) against the dollar and the appreciation (depreciation) of the stock price. The potential change in the unrealized gain (loss) on the equity securities due to a hypothetical 10% increase or decrease in either the stock price or the yen/USD exchange rate would be approximately $570,000.
The Company’s investment portfolio includes an investment in a limited partnership, which is accounted for using the cost method because the Company’s investment is less than 5% and the Company has no influence over the partnership’s operations and financial policies. The partnership’s performance is monitored by the Company to determine if the cost basis of the investment has been impaired.
The Company faces exposure to other financial market risks, including adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company’s financial results. The Company’s primary exposure has been
24
related to local currency revenue and operating expenses in Japan, Europe, and Southeast Asia. Historically, the Company has hedged currency exposures associated with certain intercompany payables denominated in local currencies and certain foreign currency revenue transactions. The goal of the Company’s hedging activity is to offset the impact of currency fluctuations on certain local currency intercompany payables and foreign currency revenue transactions. The success of this activity depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses.Outstanding forward foreign exchange contracts in Japanese yen at December 31, 2001 mature within six months. Indicators as of February 28, 2002, show that the dollar is expected to strengthen against the yen by June 30, 2002 to approximately 141 yen/ USD. Some of these indicators include foreign exchange rate forecasts received from the Company’s banking relationships. The hypothetical gain in cash flows of these yen forward contracts is estimated to be $571,000 using these assumptions.
Outstanding forward foreign exchange contracts in Euro dollars at December 31, 2001 mature within three months and approximately one year. Indicators as of February 28, 2002, show that the dollar is expected to strengthen against the Euro dollar by March 31, 2002 and December 31, 2002 to approximately 0.8500 and 0.8700 Euro/ USD, respectively. Some of these indicators include foreign exchange rate forecasts received from the Company’s banking relationships. The hypothetical gain in cash flows of these Euro forward contracts is estimated to be $204,000 and $528,000, respectively, using these assumptions.
25
Item 8: Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page Report of Independent Accountants 27 Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000, and 1999. 28 Consolidated Balance Sheets as of December 31, 2001 and 2000. 29 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2001, 2000 and 1999. 30 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999. 31 Notes to the Consolidated Financial Statements 32 Report of Independent Accountants on the Financial Statement Schedule 49 Schedule II — Valuation and Qualifying Accounts for the Years Ended December 31, 2001, 2000, and 1999. 50 26
COGNEX CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cognex Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Cognex Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 25, 200227
COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2001 2000 1999 (In thousands, except per share amounts) Revenue Product $ 119,288 $ 227,079 $ 136,278 Service 21,441 23,647 15,847 140,729 250,726 152,125 Cost of revenue Product 50,170 49,509 34,264 Service 12,175 14,311 10,957 62,345 63,820 45,221 Gross margin Product 69,118 177,570 102,014 Service 9,266 9,336 4,890 78,384 186,906 106,904 Research, development, and engineering expenses 30,094 33,341 27,536 Selling, general, and administrative expenses 61,590 61,915 43,523 Amortization of goodwill 3,108 1,964 265 Charge for intangible asset impairment 10,932 — — Operating income (loss) (27,340 ) 89,686 35,580 Investment income 10,980 9,494 6,572 Other income 689 1,038 728 Income (loss) before taxes (15,671 ) 100,218 42,880 Income tax provision (benefit) (4,544 ) 32,070 12,435 Net income (loss) $ (11,127 ) $ 68,148 $ 30,445 Net income (loss) per common and common equivalent share: Basic $ (0.25 ) $ 1.58 $ 0.74 Diluted $ (0.25 ) $ 1.49 $ 0.69 Weighted-average common and common equivalent shares outstanding: Basic 43,639 43,043 40,932 Diluted 43,639 45,698 43,986 The accompanying notes are an integral part of these consolidated financial statements.
28
COGNEX CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 31,660 $ 42,925 Short-term investments 78,513 85,429 Accounts receivable, less reserves of $2,080 and $2,150 in 2001 and 2000, respectively 17,064 47,031 Inventories 23,078 27,664 Deferred income taxes 12,175 7,741 Prepaid expenses and other current assets 10,082 8,950 Total current assets 172,572 219,740 Long-term investments 182,542 149,386 Property, plant, and equipment, net 31,213 34,012 Deferred income taxes 12,001 6,903 Other assets 8,576 26,100 $ 406,904 $ 436,141 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 4,356 $ 10,127 Accrued expenses 16,387 22,953 Accrued income taxes 2,099 9,202 Customer deposits 2,943 3,074 Deferred revenue 3,075 6,471 Total current liabilities 28,860 51,827 Other liabilities — 365 Stockholders’ equity: Common stock, $.002 par value – Authorized: 140,000 shares, issued: 46,289 and 45,788 shares in 2001 and 2000, respectively 93 92 Additional paid-in capital 173,675 163,815 Treasury stock, at cost, 2,390 and 2,365 shares in 2001 and 2000, respectively (43,419 ) (42,670 ) Retained earnings 254,037 265,164 Accumulated other comprehensive loss (6,342 ) (2,447 ) �� Total stockholders’ equity 378,044 383,949 $ 406,904 $ 436,141 The accompanying notes are an integral part of these consolidated financial statements.
29
COGNEX CORPORATION — CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated Common Stock Other Additional Treasury Stock Comprehensive Total Par Paid-in Earnings Income Comprehensive Stockholders’ (In thousands) Shares Value Capital Shares Cost Retained (Loss) Income (Loss) Equity 42,454 $85 $ 97,531 2,307 $ (41,353 ) $ 166,571 $ 41 — $ 222,875 Issuance of common stock under stock option and stock purchase plans 1,766 3 16,125 — — — — — 16,128 Tax benefit from exercise of stock options — — 8,866 — — — — — 8,866 Common stock received for payment of stock option exercises — — — 74 (2,197 ) — — — (2,197 ) Comprehensive income: Net income — — — — — 30,445 — $ 30,445 30,445 Unrealized gain on investments, net of tax of $279. — — — — — — 471 471 471 Foreign currency translation adjustment — — — — — — 36 36 36 Comprehensive income 30,952 44,220 88 122,522 2,381 (43,550 ) 197,016 548 276,624 Issuance of common stock under stock option and stock purchase plans 1,568 4 17,993 — — — — — 17,997 Tax benefit from exercise of stock options — — 23,300 — — — — — 23,300 Common stock received for payment of stock option exercises — — — 2 (77 ) — — — (77 ) Acquisition of Image Industries, Ltd. — — — (18 ) 952 — — — 952 Comprehensive income: Net income — — — — — 68,148 — 68,148 68,148 Unrealized loss on investments, net of tax of $978. — — — — — — (1,664 ) (1,664 ) (1,664 ) Foreign currency translation adjustment, net of tax of $53. — — — — — — (1,331 ) (1,331 ) (1,331 ) Comprehensive income 65,153 45,788 92 163,815 2,365 (42,675 ) 265,164 (2,447 ) 383,949 Issuance of common stock under stock option and stock purchase plans 501 1 6,115 — — — — — 6,116 Tax benefit from exercise of stock options — — 3,745 — — — — — 3,745 Common stock received for payment of stock option exercises — — — 25 (744 ) — — — (744 ) Comprehensive loss: Net loss — — — — — (11,127 ) — (11,127 ) (11,127 ) Unrealized loss on investments, net of tax of $1,807. — — — — — — (3,076 ) (3,076 ) (3,076 ) Foreign currency translation adjustment, net of tax of $64. — — — — — — (819 ) (819 ) (819 ) Comprehensive loss $ (15,022 ) 46,289 $93 $ 173,675 2,390 $ (43,419 ) $ 254,037 $ (6,342 ) $ 378,044 The accompanying notes are an integral part of these consolidated financial statements.
30
COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2001 2000 1999 (In thousands) Cash flows from operating activities: Net income (loss) $ (11,127 ) $ 68,148 $ 30,445 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation of property, plant, and equipment 6,953 6,991 6,360 Amortization of intangible assets 4,161 2,883 1,179 Amortization of investments 2,430 2,119 1,752 Tax benefit from exercise of stock options 3,745 23,300 8,866 Charge for excess inventory 16,300 — — Charge for intangible asset impairment 11,247 — — Deferred income tax benefit (7,843 ) (533 ) (6,960 ) Changes in current assets and current liabilities: Accounts receivable 27,824 (18,811 ) (6,997 ) Inventories (12,893 ) (17,902 ) (419 ) Accounts payable (5,487 ) 5,850 1,723 Accrued expenses (4,797 ) 3,416 7,394 Accrued income taxes (6,768 ) 1,623 5,117 Other current assets and current liabilities (3,118 ) (305 ) 6,303 Other operating activities 243 (355 ) 623 Net cash provided by operating activities 20,870 76,424 55,386 Cash flows from investing activities: Purchase of investments (139,863 ) (134,838 ) (97,773 ) Maturity of investments 106,310 67,119 55,566 Purchase of property, plant, and equipment (4,455 ) (7,755 ) (3,443 ) Long-term deposit — (1,700 ) — Cash paid for business and technology acquisitions, net of cash acquired (361 ) (22,240 ) (1,723 ) Net cash used in investing activities (38,369 ) (99,414 ) (47,373 ) Cash flows from financing activities: Issuance of common stock under stock option and stock purchase plans 4,637 17,920 13,931 Net cash provided by financing activities 4,637 17,920 13,931 Effect of exchange rate changes on cash 1,597 (670 ) (1,086 ) Net increase (decrease) in cash and cash equivalents (11,265 ) (5,740 ) 20,858 Cash and cash equivalents at beginning of year 42,925 48,665 27,807 Cash and cash equivalents at end of year $ 31,660 $ 42,925 $ 48,665 The accompanying notes are an integral part of these consolidated financial statements.
31
COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the application of certain accounting policies described below.
Nature of Operations
Cognex Corporation (the Company) designs, develops, manufactures, and markets machine vision systems, or computers that can “see.” The Company’s products are used to automate a wide range of manufacturing processes where vision is required.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates.
Basis of Consolidation
The consolidated financial statements include the accounts of Cognex Corporation and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions have been eliminated. Certain amounts reported in prior years have been reclassified to be consistent with the current year presentation.
Foreign Currency
The financial statements of the Company’s foreign subsidiaries, where the local currency is the functional currency, are translated using exchange rates in effect at the end of the year for assets and liabilities and average exchange rates during the year for results of operations. The resulting foreign currency translation adjustment is recorded as other comprehensive income (loss).
Cash, Cash Equivalents, and Investments
Debt securities purchased with original maturities of three months or less are classified as cash equivalents. Debt securities with original maturities greater than three months and remaining maturities of one year or less are classified as short-term investments. Debt securities with remaining maturities greater than one year, as well as equity securities and an investment in a limited partnership, are classifed as long-term investments.
Debt securities with original maturities greater than three months are stated at amortized cost, which approximates fair value, and are categorized as available-for-sale. Equity securities are stated at fair value based upon prices quoted on public stock exchanges and are also categorized as available-for-sale. Temporary changes in unrealized gains or losses on equity securities, net of tax, are recorded as other comprehensive income (loss). The Company evaluates its investments for potential impairment when an investment has experienced a decline in fair value. If the decline in fair value is determined to be other-than-temporary, an impairment would be recorded in current operations. The Company’s investment in a limited partnership is accounted for using the cost method because the Company’s investment is less than 5% and the Company has no influence over the partnership’s operating and financial policies. The partnership’s performance is monitored by the Company to determine if the cost basis of the investment has been impaired.
32
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories Inventories are stated at the lower of cost or market. Cost is determined using standard costs, which approximate the first in, first out (FIFO) method. The Company writes down its inventory for estimated excess and obsolescence equal to the difference between the cost of inventory and the estimated fair value based upon assumptions about future demand, product transitions, and market conditions.
Property, Plant, and Equipment Property, plant, and equipment are stated at cost and depreciated using the straight-line method over the assets’ estimated useful lives. Buildings’ useful lives are 39 years, building improvements’ useful lives are 10 years, and the useful lives of computer hardware, computer software, and furniture and fixtures range from two to five years. Leasehold improvements are depreciated over the shorter of the estimated useful lives or the remaining terms of the leases. Maintenance and repairs are expensed when incurred; additions and improvements are capitalized. Upon retirement or disposition, the cost and related accumulated depreciation of the assets disposed of are removed from the accounts, with any resulting gain or loss included in current operations.
Goodwill and Other Intangible Assets Goodwill and other intangible assets are stated at cost and amortized using the straight-line method over the assets’ estimated useful lives, which range from two to ten years. The Company evaluates the possible impairment of long-lived assets, including intangible assets, whenever events or circumstances indicate the carrying value of the assets may not be recoverable. At the occurrence of a certain event or change in circumstances, the Company evaluates the potential impairment of an asset based upon the estimated future undiscounted cash flows. If an impairment exists, the Company will measure the amount of such impairment based upon the present value of the estimated future cash flows using a discount rate commensurate with the risks involved.
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.
Revenue Recognition The Company’s revenue is derived primarily from two sources: (1) product sales to both original equipment manufacturer (OEM) customers, who incorporate the Company’s product into their product for resale, and end-user customers, and (2) service revenue derived principally from providing maintenance and support, education, consulting, and installation services to OEM and end-user customers.
The Company recognizes revenue from product sales upon shipment if a signed customer contract or purchase order exists, the fee is fixed or determinable, and collection of the resulting receivable is probable. If a contract or purchase order contains customer-specified acceptance criteria, then revenue is deferred until the Company can demonstrate that the customer’s criteria have been met. Revenue from maintenance and support programs is deferred and recognized ratably over the program period. Revenue from education, consulting, and installation services is recognized as the related services are performed.
33
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Research and Development Research and development costs for internally-developed products are expensed when incurred until technological feasibility has been established for the product. Thereafter, all software costs are capitalized until the product is available for general release to customers. The Company determines technological feasibility at the time the product reaches beta in its stage of development. The cost of acquired software is capitalized for products determined to have reached technological feasibility; otherwise the cost is expensed. Capitalized software costs are amortized using the straight-line method over the economic life of the product, which is typically three to five years. Historically, the time incurred between beta and general release to customers has been short, and therefore, the costs have been insignificant. As a result, the Company has not capitalized costs associated with internally-developed software products.
Income Taxes The Company accounts for income taxes under the liability method. Under this method, a deferred tax asset or liability is determined based on the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Tax credits are recorded as a reduction in income taxes. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Net Income (Loss) Per Share Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period plus potential dilutive common shares. All potential dilutive common shares are excluded from the computation of net loss per share because they are antidilutive. Dilutive common equivalent shares consist of stock options and are calculated using the treasury stock method.
Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances, excluding transactions resulting from investments by owners and distributions to owners. Other comprehensive income consists of unrealized gains and losses on investments and foreign currency translation adjustments.
Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, investments, and trade receivables. The Company primarily invests in municipal obligations of federal and state government entities. The Company has established guidelines relative to credit ratings, diversification, and maturities that maintain safety and liquidity. The Company has not experienced any significant realized losses on its cash equivalents and investments.
A significant portion of the Company’s sales and receivables are from customers who are either in or who serve the semiconductor and electronics industries. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The Company has not experienced any significant losses related to the collection of its accounts receivable.
34
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Off-Balance Sheet Risk In certain instances, the Company enters into forward exchange contracts to hedge against foreign currency fluctuations. These contracts are used to reduce the Company’s risk associated with exchange rate movements, as the gains or losses on these contracts are intended to offset the exchange rate losses or gains on the underlying exposures. The Company does not engage in foreign currency speculation. The Company had $28,389,000 and $16,445,000 of foreign exchange contracts outstanding at December 31, 2001 and 2000, respectively. The foreign exchange contracts were in Japanese Yen and Euro Dollar in 2001 and 2000. Based on year-end exchange rates, the Company estimates the aggregate contract value of the forward exchange contracts to be representative of the fair values of these instruments.
Foreign Currency Risk The Company enters into transactions denominated in foreign currencies and includes the exchange rate gains or losses arising from such transactions in current operations. The Company recorded a net exchange rate loss of $328,000 in 2001 and net exchange rate gains of $99,000 in 2000 and $955,000 in 1999.
New Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations.” SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. This standard requires that all business combinations be accounted for under the purchase method and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. The Company adopted SFAS No. 141 on July 1, 2001 and it did not have a material impact on the Company’s financial position and results of operations.
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. This standard requires, among other things, the cessation of the amortization of goodwill. In addition, SFAS No. 142 includes provisions for the reclassification of certain existing intangible assets as goodwill, the reclassification of certain existing intangible assets out of previously reported goodwill, the reassessment of the useful lives of existing intangible assets, and the identification of reporting units for the purpose of assessing potential future impairments of goodwill. This standard also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company adopted SFAS No. 142 on January 1, 2002 and is required to complete the transition impairment test no later than June 30, 2002. The Company is currently assessing the impact of this new statement on its financial position and results of operations, but does not expect it to have a material impact upon adoption. Effective January 1, 2002, the Company ceased the amortization of goodwill.
�� In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” This standard requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company adopted SFAS No. 144 on January 1, 2002 and it did not have a material impact on its financial position and results of operations.
35
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments and Risk Management
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending upon whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company adopted SFAS No. 133 on January 1, 2001 and it did not have a material impact on the Company’s financial position and results of operations.
The Company enters into forward exchange contracts to hedge a portion of its intercompany sales of inventory by the United States parent to its foreign subsidiaries payable in the foreign subsidiaries’ local currency. These contracts, which related primarily to the Japanese Yen and Euro, generally have a time period of three to six months. Realized and unrealized gains and losses on forward exchange contracts that do not qualify for hedge accounting are recognized immediately in earnings. The total loss incurred for transactions that did not qualify as hedges was $154,000 for the year ended December 31, 2001.
The Company uses forward exchange contracts to hedge net investments in certain of its European subsidiaries, as well as royalty and cost-sharing payments due the parent company. Market value gains and losses on forward exchange contracts hedging firm commitments are recognized when the hedged transaction occurs. These contracts, which related primarily to the Euro, generally have a maximum term of two years. Forward exchange contracts receive hedge accounting on firmly committed transactions when they are designated as a hedge of the designated currency exposure and are effective in minimizing such exposure.
Forward exchange contracts that qualify for hedge accounting with notional amounts of $9,700,000, $6,800,000, and $3,842,000 to exchange Euros for US dollars were outstanding as of December 31, 2001. For the year ended December 31, 2001, the Company recorded a cumulative unrealized gain of $1,106,000 related to these foreign exchange contracts in other comprehensive income. These amounts offset the foreign exchange impact (the hedged transaction), which resulted in an unrealized foreign exchange loss of $934,000 for the year ended December 31, 2001.
The market risk exposure from forward exchange contracts is assessed in light of the underlying currency exposures and is controlled by the initiation of additional or offsetting foreign exchange contracts.
36
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments consist of the following:
December 31, 2001 2000 (In thousands) Cash $ 19,808 $ 19,204 Municipal obligations 11,852 23,721 Total cash and cash equivalents 31,660 42,925 Municipal obligations 78,513 85,429 Total short-term investments 78,513 85,429 Municipal obligations 169,730 139,440 Equity securities 5,687 5,571 Investment in limited partnership 7,125 4,375 Total long-term investments 182,542 149,386 $ 292,715 $ 277,740 Equity securities had a cost basis of $12,461,000 and a temporary unrealized loss of $6,774,000 at December 31, 2001 and a cost basis of $7,462,000 and a temporary unrealized loss of $1,891,000 at December 31, 2000. These equity securities are in publicly-traded Japanese companies with volatile stock prices. These companies are established market leaders in the semiconductor and electronics industries, which are highly cyclical industries and have historically experienced extended periodic downturns. It is the Company’s intention to hold these securities on a long-term basis consistent with its long-term commitment to the Japanese market. The Company has determined that this unrealized loss is temporary because these stock price movements represent short-term trading fluctuations due to the cyclical nature of the semiconductor and electronics industries, which the Company believes are currently recovering from a downturn, and not a fundamental change in the underlying companies.
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 of up to $25,000,000 over a ten-year period, of which $7,125,000 had been invested as of December 31, 2001 and $4,375,000 had been invested as of December 31, 2000. A director of the Company is a Managing General Partner of Venrock Associates.
The Company has not experienced any significant realized gains or losses on the sale of its investments or other-than-temporary impairments on its investments in 2001, 2000, and 1999.
Inventories
Inventories consist of the following:
December 31, 2001 2000 (In thousands) Raw materials $ 16,108 $ 14,263 Work-in-process 4,162 5,789 Finished goods 2,808 7,612 $ 23,078 $ 27,664 37
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. $12,500,000 of this charge represents reserves against existing inventories and is accordingly included in “Inventories” on the Consolidated Balance Sheets. The remaining $3,800,000 of this charge represents commitments to purchase excess components and systems from various suppliers and accordingly is included in “Accrued Expenses” on the Consolidated Balance Sheets. The Company is in the process of negotiating with vendors for the settlement of these commitments, which may result in a recovery of a portion of the accrued amount.
Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
December 31, 2001 2000 (In thousands) Land $ 3,051 $ 3,051 Buildings 17,571 17,571 Building improvements 4,130 3,997 Computer hardware and software 33,868 31,061 Furniture and fixtures 3,509 3,354 Leasehold improvements 1,967 2,049 64,096 61,083 Less: accumulated depreciation (32,883 ) (27,071 ) $ 31,213 $ 34,012 Buildings include property held for lease with a cost basis of $4,950,000 at December 31, 2001 and 2000 and accumulated depreciation of $825,000 and $698,000 at December 31, 2001 and 2000, respectively.
Other Assets
Other assets consist of the following:
December 31, 2001 2000 (In thousands) Goodwill $ 5,672 $ 20,317 Acquired complete technology and other intangible assets 5,760 7,358 11,432 27,675 Less: accumulated amortization (6,510 ) (7,037 ) 4,922 20,638 Deposits and other 3,654 5,462 $ 8,576 $ 26,100 Throughout 2001, the Company’s results were negatively impacted by the worldwide slowdown in capital equipment spending, as well as the weakened global economy. During the fourth quarter of 2001, a number of factors indicated that the business slowdown would be both longer and more severe than the Company had
38
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
previously anticipated, including the continued decline in order rates across a variety of industries and product lines. As a result of the significant adverse change in the business outlook, the Company evaluated the possible impairment of its intangible assets in accordance with Statement of Financial Accounting Standard (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” These analyses resulted in impairment charges based on the difference between the carrying amount and the estimated fair value of certain acquisition related intangible assets. The fair value was based on discounting estimated future cash flows for assets grouped at the lowest level for which there were identifiable cash flows at a discount rate commensurate with the risks involved. The resulting analyses yielded a $10,932,000 impairment charge related to goodwill arising primarily from the acquisitions in 2000 of the machine vision businesses of Komatsu Ltd. and Honeywell International Inc. The analyses also resulted in a $315,000 charge, included in “Cost of product revenue,” related to the impairment of complete technology primarily acquired from Komatsu Ltd.
Accrued Expenses
Accrued expenses consist of the following:
December 31, 2001 2000 (In thousands) Purchase commitments $ 3,800 $ — Salaries, commissions, and payroll taxes 2,564 3,010 Professional fees 2,440 2,099 Warranty 2,007 3,127 Vacation 1,845 2,020 Bonus — 5,964 Other 3,731 6,733 $ 16,387 $ 22,953 Leases
The Company conducts certain of its operations in leased facilities. These lease agreements expire at various dates through 2014 and are accounted for as operating leases. Annual rent expense totaled $4,673,000 in 2001, $3,717,000 in 2000, and $2,620,000 in 1999. Future minimum rental payments under these agreements are as follows at December 31, 2001 (in thousands):
Year Amount 2002 $ 3,722 2003 3,180 2004 1,743 2005 1,223 2006 88 Thereafter 591 $ 10,547 The Company owns an 83,000 square-foot office building adjacent to its corporate headquarters. The building is currently occupied with tenants who have lease agreements that expire at various dates through 2003. Annual rental income totaled $1,426,000 in 2001, $1,755,000 in 2000, and $1,581,000 in 1999.
39
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental income and related expenses are included in “Other income” on the Consolidated Statements of Operations. Future minimum rental receipts under non-cancelable lease agreements are $507,000 in 2002 and $264,000 in 2003.
Stockholders’ Equity
Preferred Stock
The Company has 400,000 shares of authorized but unissued $.01 par value preferred stock.
Stock Repurchase Programs
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. As of December 31, 2001, the Company had not repurchased any shares under this program.
Stock-Based Compensation Plans
The Company has adopted the disclosure requirements of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation.” The Company continues to recognize compensation costs using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” No compensation costs were recognized in 2001, 2000, and 1999.
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 SFAS No. 123 had been adopted, are as follows:
Year Ended December 31, 2001 2000 1999 (In thousands, except per share amounts) Net income (loss) As reported $ (11,127 ) $ 68,148 $ 30,445 Pro forma (28,825 ) 58,591 20,203 Basic net income (loss) per share As reported (0.25 ) 1.58 0.74 Pro forma (0.66 ) 1.36 0.49 Diluted net income (loss) per share As reported (0.25 ) 1.49 0.69 Pro forma (0.66 ) 1.34 0.48 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 used for grants in 2001, 2000, and 1999, respectively: a risk-free interest rate of 4.5%, 6.1%, and 5.6%; an expected life of 2.7, 3.1, and 4.5 years; an expected volatility of 62%, 60%, and 54%; and no expected dividends.
Stock Option Plans
At December 31, 2001, the Company had 2,737,930 shares available for grant under the following stock option plans: the 1998 Director Plan, 74,000; the 1998 Stock Incentive Plan, 2,263,930; and the 2001 Interim General Stock Incentive Plan, 400,000.
40
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 21, 1998, the stockholders approved the 1998 Stock Incentive Plan, under which the Company may initially grant stock options and stock awards to purchase up to 1,700,000 shares of common stock. Effective January 1, 1999 and each January 1st thereafter during the term of the 1998 Stock Incentive Plan, the number of shares of common stock available for grants of stock options and stock awards shall be increased automatically to an amount equal to 4.5% of the total number of issued shares of common stock, including shares held in treasury, as of the close of business on December 31st of the preceding year.
On November 27, 2000, employees forfeited 652,280 options. The Company committed to grant those employees the same number of options approximately seven months later at the then fair market value with similar terms and conditions. On June 8, 2001, the Company granted 583,580 options at the then fair market value to those same employees. Options granted on June 8, 2001 were less than the original amount forfeited due to employee terminations.
Stock options generally vest over four years and generally expire no later than ten years from the date of grant.
The following table summarizes the status of the Company’s stock option plans at December 31, 2001, 2000, and 1999, and changes during the years then ended:
2001 2000 1999 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price (In thousands, except per share amounts) Outstanding at beginning of year 8,014 $ 21.04 8,047 $ 16.09 8,322 $ 11.65 Granted at fair market value 2,630 25.28 2,985 35.65 2,059 28.50 Granted above fair market value — — 60 59.10 — — Exercised (467 ) 10.10 (1,622 ) 10.78 (1,764 ) 9.00 Forfeited (648 ) 27.54 (1,456 ) 36.58 (570 ) 18.02 Outstanding at end of year 9,529 22.31 8,014 21.04 8,047 16.09 Options exercisable at year-end 2,842 15.93 1,913 13.05 2,091 9.47 Weighted-average grant-date fair value of options granted during the year at fair market value $ 10.34 $ 15.60 $ 14.06 Weighted-average grant-date fair value of options granted during the year above fair market value — $ 20.39 — 41
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable Weighted- Average Weighted- Remaining Average Contractual Number Weighted- Range of Number Life (in Exercise Number Average Exercise Prices Outstanding years) Price Exercisable Exercise Price (In thousands, except per share amounts) $ 1.00-15.72 2,492 6.0 $ 11.03 1,639 $ 10.30 15.88-18.13 1,963 8.6 17.19 528 16.20 18.19-25.60 2,041 9.2 23.59 197 23.00 25.70-30.81 1,991 9.3 28.98 336 28.83 30.86-44.44 468 8.4 35.68 108 36.35 45.41-59.69 574 12.2 50.22 34 49.31 9,529 8.4 22.31 2,842 15.93 Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (ESPP), employees who have completed six months of continuous employment with the Company may purchase common stock semi-annually at the lower of 85% of the fair market value of the stock at the beginning or end of the six-month payment period through accumulation of payroll deductions. Employees are required to hold common stock purchased under the ESPP for a period of one year from the date of purchase. Common stock reserved for future sales totaled 352,104 shares at December 31, 2001. Shares purchased under the ESPP totaled 34,004 in 2001, 22,638 in 2000, and 24,118 in 1999. The weighted-average fair value of shares purchased under the ESPP was $7.73 in 2001, $17.22 in 2000, and $17.59 in 1999.
For the purpose of providing pro forma disclosures, the fair values of shares purchased were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for purchases in 2001, 2000, and 1999, respectively: a weighted-average risk-free interest rate of 2.9%, 5.9%, and 5.3%; an expected life of six months; an expected volatility of 62%, 60%, and 54%; and no expected dividends.
Employee Savings Plan
Under the Company’s Employee Savings Plan, a defined contribution plan, employees who have attained age 21 may contribute 1% to 15% of their salary on a pre-tax basis subject to the annual dollar limitations established by the Internal Revenue Service. The Company contributes fifty cents for each dollar an employee contributes, with a maximum contribution of 3% of an employee’s pre-tax salary. Company contributions vest after five years of continuous employment with the Company. Prior to January 1, 2000, Company contributions were made at the discretion of management. Beginning January 1, 2002, participants may contribute 1% to 25% of their salary on a pre-tax basis and Company contributions are vested 20%, 40%, 60%, and 100% after two, three, four, and five years of continuous employment with the Company, respectively. Company contributions approximated $1,004,000 in 2001, $844,000 in 2000, and $490,000 in 1999. Cognex stock is not an investment alternative, nor are Company contributions made in Cognex stock.
42
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Domestic income before taxes was $3,068,000 and foreign loss before taxes was $18,739,000 for the year ended December 31, 2001. Foreign income (loss) was not significant for the years ended December 31, 2000 and 1999.
The provision (benefit) for income taxes consists of the following:
Year Ended December 31, 2001 2000 1999 (In thousands) Current: Federal $ 3,742 $ 29,335 $ 12,838 State (319 ) 1,467 2,390 Foreign 536 3,793 1,154 3,959 34,595 16,382 Deferred: Federal (7,093 ) (2,301 ) (2,167 ) State 822 1,279 (1,515 ) Foreign (2,232 ) (1,503 ) (265 ) (8,503 ) (2,525 ) (3,947 ) $ (4,544 ) $ 32,070 $ 12,435 A reconciliation of the United States federal statutory corporate rate to the Company’s effective tax rate is as follows:
Year Ended December 31, 2001 2000 1999 Income tax provision (benefit) at federal statutory rate (35 )% 35 % 35 % State income taxes, net of federal benefit — 2 2 Foreign Sales Corporation — (4 ) (3 ) Tax-exempt investment income (23 ) (3 ) (5 ) Foreign rate differential 12 2 — Goodwill amortization and impairment charges 15 — — Other 2 — — Provision (benefit) for income taxes (29 )% 32 % 29 % Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company’s deferred tax assets are as follows:
December 31, 2001 2000 (In thousands) Current deferred tax assets: Inventory and revenue related $ 9,453 $ 4,948 Bonus, commission, and other compensation 429 793 Other 2,293 2,000 Total net current deferred tax asset $ 12,175 $ 7,741 43
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001 2000 (In thousands) Noncurrent deferred tax assets (liabilities): Federal and state credit carryforwards $ 5,389 $ 3,262 Foreign net operating loss carryforwards 3,420 648 Acquired complete technology and other intangibles 3,645 1,783 Acquired in-process technology 1,250 1,395 Depreciation 477 707 Unrealized investment gains (losses) (2,362 ) (654 ) Other 182 (238 ) Total net noncurrent deferred tax asset $ 12,001 $ 6,903 As of December 31, 2001, the Company had federal research and experimentation carryforwards of approximately $2,251,000, which may be available to offset future federal income tax liabilities and will begin to expire in 2021. The Company also had approximately $1,462,000 of alternative minimum tax, which may be available to offset future regular income tax liabilities. In addition, the Company had $1,676,000 of state research and experimentation credits which will begin to expire in 2009. As of December 31, 2001, the Company’s foreign subsidiaries had net operating loss carryforwards of approximately $17,876,000, which expire over various periods, of which $13,832,000 have an unlimited expiration period.
Net Income (Loss) Per Share
Net income (loss) per share is calculated as follows:
Year Ended December 31, 2001 2000 1999 (In thousands, except per share amounts) Net income (loss) $ (11,127 ) $ 68,148 $ 30,445 Basic: Weighted-average common shares outstanding 43,639 43,043 40,932 Net income (loss) per common share $ (0.25 ) $ 1.58 $ 0.74 Diluted: Weighted-average common shares outstanding 43,639 43,043 40,932 Effect of dilutive securities: Stock options — 2,655 3,054 Weighted-average common and common equivalent shares outstanding 43,639 45,698 43,986 Net income (loss) per common and common equivalent share $ (0.25 ) $ 1.49 $ 0.69 Stock options to purchase 3,066,622, 877,342, and 97,672 shares of common stock were outstanding during the years ended December 31, 2001, 2000, and 1999, respectively, but were not included in the calculation of diluted net income per share because the options’ exercise prices were greater than the average market price of the Company’s common stock during those years. For the year ended December 31, 2001, potential common stock equivalents of 1,615,524 were not included in the calculation of diluted net loss per share because they were antidilutive. Although these stock options and potential common stock equivalents were antidilutive in 2001, 2000, and 1999, they may be dilutive in future years’ calculations.
44
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements. The Company evaluates segment performance based upon income or loss from operations, excluding nonrecurring charges and foreign currency exchange rate gains or losses.
The following table summarizes information about the Company’s segments (in thousands):
Reconciling MVSD SISD Items Consolidated Product revenue $ 100,188 $ 19,100 — $ 119,288 Service revenue 16,886 4,555 — 21,441 Depreciation and amortization 9,247 1,644 $ 223 11,114 Inventory and intangible asset impairment charges 27,547 27,547 Operating income (loss) 10,189 138 (37,667 ) (27,340 ) Product revenue $ 212,610 $ 14,469 — $ 227,079 Service revenue 18,861 4,786 — 23,647 Depreciation and amortization 8,243 1,324 $ 307 9,874 Operating income (loss) 98,352 (315 ) (8,351 ) 89,686 Product revenue $ 128,321 $ 7,957 — $ 136,278 Service revenue 13,197 2,650 — 15,847 Depreciation and amortization 6,019 1,261 $ 259 7,539 Operating income (loss) 49,634 (7,056 ) (6,998 ) 35,580 Reconciling items consist of inventory and intangible asset impairment charges, which are not included in the segment’s operating income (loss) for the purpose of making operating decisions and assessing performance. These charges include $21,892,000 related to the MVSD segment and $5,655,000 related to the SISD segment. Reconciling items also consist of unallocated corporate expenses, which primarily include corporate headquarters and patent infringement litigation. Asset information by segment is not produced internally, and therefore is not presented.
One customer accounted for $25,805,000, or 10%, of revenue in 2000 and $19,611,000, or 13%, of revenue in 1999. No customer accounted for greater than 10% of revenue in 2001.
45
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about geographic areas (in thousands):
United States Japan Ireland Other Eliminations Consolidated Revenue: Unaffiliated $ 92,412 $ 29,287 $ 19,030 — — $ 140,729 Intercompany 18,668 — — — $ (18,668 ) — Long-lived assets 30,813 2,153 2,031 $ 4,792 — 39,789 Revenue: Unaffiliated $ 208,265 $ 42,461 — — — $ 250,726 Intercompany 13,522 — — — $ (13,522 ) — Long-lived assets 41,701 2,875 $ 8,753 $ 6,783 — 60,112 Revenue: Unaffiliated $ 130,618 $ 21,507 — — — $ 152,125 Intercompany 10,162 — — — $ (10,162 ) — Long-lived assets 30,614 2,089 — $ 2,702 — 35,405 Revenue is presented geographically based upon the country in which the sale is recorded. Inventories are transferred to the Company’s Japanese and Irish subsidiaries at previously established transfer prices, resulting in intercompany revenue and receivables for the United States operation.
The Other column represents all long-lived assets in other countries, none of which were significant, and certain deposits that are included in “Other assets” on the Consolidated Balance Sheets.
Acquisition of Komatsu Ltd. Machine Vision Business
On March 31, 2000, the Company acquired selected assets of the machine vision business of Komatsu Ltd. for $11,200,000 in cash, with the potential for an additional cash payment in 2002 of up to $8,000,000 depending upon certain performance criteria. The purchase price was allocated as follows: $297,000 to tangible equipment, to be depreciated in accordance with the Company’s depreciation policy; $400,000 to workforce, to be amortized over two years; $2,462,000 to complete technology, to be amortized over five years; and $8,041,000 to goodwill, also to be amortized over five years. Although the measurement period for the performance criteria does not end until March 2002, based upon information available as of December 31, 2001, the Company does not believe the performance criteria will be met, and therefore, does not anticipate making any additional payments in 2002.
The acquisition was accounted for under the purchase method of accounting. Accordingly, 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 financial position and results of operations of the acquired business were not material compared to the Company’s financial position and consolidated results of operations, and therefore, pro forma results are not presented.
As a result of the significant adverse change in the business outlook determined in the fourth quarter of 2001, the Company evaluated the possible impairment of its intangible assets in accordance with Statement of Financial Accounting Standard (SFAS) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” These analyses resulted in impairment charges based on the difference between the carrying amount and the estimated fair value of the intangible assets associated with the acquisition of the machine vision business of Komatsu Ltd. Fair value was based on discounting estimated future cash flows for assets grouped at the lowest level for which there were identifiable cash flows at a
46
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
discount rate commensurate with the risks involved. The resulting analyses yielded a $5,550,000 impairment charge, of which $5,227,000 was allocated to the carrying amount of goodwill and $50,000 was allocated to the carrying amount of workforce, which reduced the carrying amounts of these assets to zero. The remaining $273,000 reduced the carrying amount of complete technology.
Acquisition of Image Industries, Ltd.
On April 20, 2000, the Company acquired all of the outstanding shares of Image Industries Ltd., a privately-held manufacturer of low-cost machine vision systems located in the United Kingdom. The purchase price of $2,706,000 included $876,000 in cash at closing, $878,000 in cash to be paid through 2002, and 17,619 shares of Cognex common stock, issued from treasury, with a fair value of $952,000.
The shares were issued to three persons in reliance upon the exemption afforded by Section 4(2)At December 31, 2001, $341,000 of theSecurities Actpurchase price remained to be paid in 2002. The purchase price was allocated as follows: $671,000 to tangible net assets; $200,000 to workforce, to be amortized over five years; and $1,835,000 to goodwill, also to be amortized over five years.The acquisition was accounted for under the purchase method of
1933 for transactions not involving a public offering. The Company has never declared or paid cash dividends on shares of its common stock. The Company currently intends to retain all of its earnings to financeaccounting. Accordingly, thedevelopment and expansion of its business and therefore does not intend to declare or pay cash dividends on its common stock in the foreseeable future. Any future declaration and payment of dividends will be subject to the discretion of the Company's Board of Directors, will be subject to applicable law, and will depend upon the Company'sresults of operationsearnings, financial condition, contractual limitations, cash requirements, future prospects, and other factors deemed relevant byof theCompany's Board of Directors. ITEM 6: SELECTED FINANCIAL DATA Information with respect to this item may be foundacquired company have been included in thesection captioned "Five-Year SummaryCompany’s consolidated results ofSelected Financial Data," appearing on page 59operations since the date of theAnnual Reportacquisition. The financial position and results of operations of the acquired company were not material compared toStockholdersthe Company’s consolidated financial position and results of operations, and therefore, pro forma results are not presented.Acquisition of Honeywell International Inc. Web Inspection Business
On September 30, 2000, the Company acquired selected assets of the web inspection business of Honeywell International Inc. (Honeywell) for $8,400,000 in cash. The Company paid an additional $1,600,000 at the closing that is contingent upon the achievement of certain performance criteria in 2001. There is the potential for an additional payment of up to $1,600,000 in 2002, also depending upon the achievement of certain performance criteria. As part of the agreement, the Company and Honeywell also formed an alliance in which the Company will provide its web inspection systems to Honeywell’s customers in the pulp and paper industry worldwide. The purchase price was recorded as goodwill to be amortized over ten years. The measurement period for the
yearperformance criteria ended December 31,2000, which is Exhibit 13 hereto,2001, andis incorporated herein by reference. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respectin 2002 the Company expects tothis item may be foundmake no further payments and to receive a refund of the $1,600,000 paid at closing.The acquisition was accounted for under the purchase method of accounting. Accordingly, the results of operations of the acquired business have been included in the
section captioned "Management's DiscussionCompany’s consolidated results of operations since the date of the acquisition. The financial position andAnalysisresults of operations of the acquired business were not material compared to the Company’s consolidated financial position and results of operations, and therefore, pro forma results are not presented.As a result of the significant adverse change in the business outlook determined in the fourth quarter of 2001, the Company evaluated the possible impairment of its intangible assets in accordance with Statement of Financial
Condition and Results of Operations," appearing on pages 26 through 32 of the Annual Report to StockholdersAccounting Standard (SFAS) No. 121, “Accounting for theyear ended December 31, 2000, which is Exhibit 13 hereto,Impairment of Long-Lived Assets andis incorporated herein by reference. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company maintains investment portfolio holdings of various issuers, types, and maturities. The Company's cash and investments include cash equivalents, which the Company considersfor Long-Lived Assets to beinvestments purchased with original maturities of three months or less. Investments having original maturitiesDisposed Of.” These analyses resulted inexcess of three months are stated at amortized cost, which approximates fair value,impairment charges based on the difference between the carrying amount andare classified as available-for-sale. Giventheshort maturities and investment grade quality of the portfolio holdings at December 31, 2000, a sharp rise in interest rates should not have a material adverse impact on theestimated fair value of theCompany's investment portfolio. Asintangible assets associated with the acquisition of the web inspection business of Honeywell. Fair value was based on discounting estimated future cash flows for assets grouped at the lowest level for which there were identifiable cash flows at aresult,discount rate commensurate with the risks involved. The resulting analyses yielded a $5,512,000 impairment charge that reduced the carrying amount of goodwill.47
COGNEX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Statement of Cash Flows Disclosure
Cash paid for income taxes totaled $6,741,000 in 2001, $8,386,000 in 2000, and $2,347,000 in 1999.
Common stock received as payment for stock option exercises totaled $744,000 in 2001, $77,000 in 2000, and $2,197,000 in 1999.
In 2000, the Company
does not currently hedge these interest rate exposures. 1114 The Company faces exposure to financial market risks, including adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company's financial results. The Company's primary exposure has been related to local currency revenue and operating expenses in Japan, Europe, and Southeast Asia. Historically, the Company has hedged currency exposures associated with certain intercompany payables denominated in local currencies and certain foreign currency revenue transactions. The goalissued 17,619 shares ofthe Company's hedging activity is to offset the impact of currency fluctuations on certain local currency intercompany payables and foreign currency revenue transactions. The success of this activity depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. Outstanding forward foreign exchange contracts in Japanese yen at December 31, 2000 mature within 6 months. Indicators as of March 5, 2001, show that the dollar is expected to strengthen against the yen by June 30, 2001, to approximately 120 yen/USD. The hypothetical gain in cash flows of these yen forward contracts is estimated to be $481,287 using these assumptions. Outstanding forward foreign exchange contracts in the Euro dollar at December 31, 2000 mature within approximately 2 years. Indicators as of March 5, 2001, show that the dollar is expected to strengthen against the Euro dollar by September 30, 2002, to approximately .8500 Euro/USD. The hypothetical gain in cash flows of these Euro forward contracts is estimated to be $74,844 using these assumptions. The following table (dollars in thousands) presents hypothetical changes in fair value in the Company's financial instruments at December 31, 2000 that are sensitive to changes in interest rates. The modeling technique measures the change in fair value arising from selected potential changes in interest rates. Movements in interest rates of plus or minus 50 basis points ("BP") and 100 BP reflect immediate hypothetical shifts in the fair value of these investments. Fair value represents the market value of the principal plus accrued interest and dividends of certain interest-rate-sensitive securities at December 31, 2000.
Valuation of securities given an No change in Valuation of securities given an Type of security interest rate decrease interest rates interest rate increase - --------------------------------------------------------------------------------------------------------------------- (100 BP) (50 BP) 50 BP 100 BP - ---------------------------------------------------------------------------------------------------------------------Municipal obligations with contractual maturities no greater than 3 years $253,417,528 $252,252,551 $251,002,367 $249,843,477 $248,689,454A 50 BP move in the Federal Funds Rate has occurred in 8 of the last 40 quarters. There has not been a 100 BP movement in the Federal Funds Rate in any of the last 40 quarters. The Company has equity securities purchased in the Japanese marketCognex treasury stock, with a fair value ofapproximately $5,571,000$952,000, in connection with the acquisition of Image Industries, Ltd.The Company retired certain fully-depreciated property, plant, and
an unrealized lossequipment totaling $282,000 in 2001 and $4,664,000 in 2000.Selected Quarterly Financial Data (Unaudited)
Quarter Ended April 1, July 1, September 30, December 31, 2001 2001 2001 2001 (In thousands, except per share amounts) Revenue $ 44,206 $ 37,379 $ 33,974 $ 25,170 Gross margin 31,414 25,128 22,904 (1,062 ) Operating income (loss) 4,017 254 380 (31,991 ) Net income (loss) 4,761 2,155 2,292 (20,335 ) Basic net income (loss) per share 0.11 0.05 0.05 (0.46 ) Diluted net income (loss) per share 0.11 0.05 0.05 (0.46 )
Quarter Ended April 2, July 2, October 1, December 31, 2000 2000 2000 2000 (In thousands, except per share amounts) Revenue $ 54,495 $ 62,187 $ 67,960 $ 66,084 Gross margin 40,577 46,027 50,558 49,744 Operating income 20,626 22,798 25,595 20,667 Net income 15,412 17,358 19,391 15,987 Basic net income per share 0.36 0.40 0.45 0.37 Diluted net income per share 0.34 0.38 0.42 0.36 48
COGNEX CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of
$1,891,000 at December 31, 2000. The unrealized gain (loss) recorded as other comprehensive income (loss) is made upDirectors and Stockholders oftwo components - the yen strengthening (weakening) against the dollar and the appreciation (depreciation)Cognex Corporation:Our audits of
the stock price. Indicators as of March 5, 2001, show that the dollar is expected to strengthen against the yen by December 31, 2001, to approximately 128 yen/USD. Based on these indicators, a hypothetical change in the fair value due to a weakening yen would be a $594,000 unrealized gain. The potential change in the fair value due to a hypothetical 10% increase or decrease in the stock price would be a $557,000 change in the unrealized gain (loss). 1215 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this item, which includesthe consolidated financial statementsand notes thereto,referred to in our report dated January 25, 2002 appearing in the 2001 Annual Report on Form 10-K ofindependent accountants, and supplementary data, may be found on pages 33 through 60Cognex Corporation also included an audit of theAnnual Report to Stockholders forfinancial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, theyear ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference. ITEM 9: CHANGES INinformation set forth therein when read in conjunction with the related consolidated financial statements./s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 25, 200249
COGNEX CORPORATION
SCHEDULE II — VALUATION AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREQUALIFYING ACCOUNTS
Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Other Period (Dollars in thousands) Allowance for Doubtful Accounts: 2001 $ 2,150 $ 190 — $ (260 )(a) — $ 2,080 2000 2,836 275 — (624 )(a) $ (337 )(c) 2,150 1999 2,583 1,050 — (797 )(a) — 2,836 Reserve for Inventory Obsolescence: 2001 $ 3,709 $ 16,289 — $ (435 )(b) — $ 19,563 2000 3,955 785 — (1,031 )(b) — 3,709 1999 2,860 1,545 — (450 )(b) — 3,955
(a) Specific write-offs (b) Specific dispositions (c) Reversal of specific write-offs due to collection
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting or financial disclosure during
20002001 or1999. 13162000.PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10: Directors and Executive Officers of the Registrant Information with respect to Directors of the Company may be found in the section captioned
"Election“Election of Directors,"” appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the20012002 Annual Meeting of Stockholders to be held on April26, 2001.25, 2002. Such information is incorporated herein by reference. Information with respect to Executive Officers of the Company may be found in the section captioned"Executive“Executive Officers and Other Members of the Management Team of the Registrant,"” appearing in Part I of this Annual Report on Form 10-K.ITEM 11: EXECUTIVE COMPENSATION
Item 11: Executive Compensation Information with respect to this item may be found in the sections captioned
"Information“Information Concerning the Board of Directors," "Compensation/” “Compensation/ Stock Option Committee Report on Executive Compensation," "Comparison” “Comparison of Five Year Cumulative Total Returns Performance Graph for Cognex Corporation,"” and"Executive“Executive Compensation,"” appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the20012002 Annual Meeting of Stockholders to be held on April26, 2001.25, 2002. Such information is incorporated herein by reference.ITEM 12: SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12: Security Ownership and Certain Beneficial Owners and Management Information with respect to this item may be found in the sections captioned
"Principal“Principal Holders of VotingSecurities"Securities” and"Security“Security Ownership of Directors and Officers,"” appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the20012002 Annual Meeting of Stockholders to be held on April26, 2001.25, 2002. Such information is incorporated herein by reference.ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS50
Item 13: Certain Relationships and Related Transactions Information with respect to this item may be found in the section captioned
"Compensation“Compensation Committee Interlocks and Insider Participation,"” appearing in the definitive Proxy Statement for the Special Meeting in Lieu of the20012002 Annual Meeting of Stockholders to be held on April26, 2001.25, 2002. Such information is incorporated herein by reference.1417PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements The
following consolidatedfinancial statementsof Cognex Corporation and the report of independent accountants relating theretoare included inthe Company'sItem 8 of this Annual Reportto Stockholders for the year ended December 31, 2000, which is Exhibit 13 hereto, and is incorporated herein by reference: Report of Independent Accountants Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998 Consolidated Balance Sheets at December 31, 2000 and 1999 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (2)on Form 10-K
(2) Financial Statement Schedule Financial Statement Schedule
Included at the endII is included in Item 8 of thisreport are the following:Annual Reportof Independent Accountantsonthe Financial Statement Schedule Schedule II - Valuation and Qualifying AccountsForm 10-K.Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto.
(3) Exhibits
(3) Exhibits The Exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index appearing on page
18,53 immediately preceding such Exhibits.(b) Reports on Form 8-K
(b) Reports on Form 8-K There were no Reports on Form 8-K filed during the fourth quarter of the year ended December 31,
2000. 15182001.51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
COGNEX CORPORATION /s/ Robert J. Shillman ------------------------------------ Robert J. Shillman (President, Chief Executive Officer, and Chairman of the Board of Directors)
COGNEX CORPORATION /s/ ROBERT J. SHILLMAN Robert J. Shillman (President, Chief Executive Officer, and Chairman of the Board of Directors) March
26, 200115, 2002Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----/s//s/ ROBERT J. SHILLMAN
Robert J. ShillmanPresident, Chief Executive Officer, March 26, 2001 - --------------------------and Chairman of the Board of DirectorsRobert J. Shillman(principal executive officer)/s/March 15, 2002 /s/ RICHARD MORIN
Richard MorinSenior Vice President of Finance, Chief Financial March 26, 2001 - --------------------------Officer, and TreasurerRichard Morin(principal financial and accounting officer)/s/March 15, 2002 /s/ PATRICK ALIAS
Patrick AliasExecutive Vice President and Director March 15, 2002 /s/ JERALD FISHMAN
Jerald FishmanDirector March 26, 2001 - -------------------------- Jerald Fishman /s/15, 2002/s/ WILLIAM KRIVSKY
William KrivskyDirector March 26, 2001 - -------------------------- William Krivsky /s/15, 2002/s/ ANTHONY SUN
Anthony SunDirector March 26, 2001 - -------------------------- Anthony Sun /s/15, 2002/s/ REUBEN WASSERMAN
Reuben WassermanDirector March 26, 2001 - -------------------------- Reuben Wasserman15, 20021619 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Cognex Corporation: Our audits of the consolidated financial statements referred to in our report dated January 22, 2001 appearing in the 2000 Annual Report to Stockholders of Cognex Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14 (a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Boston, Massachusetts /s/ PricewaterhouseCoopers LLP January 22, 2001 1720 SCHEDULE II COGNEX CORPORATION VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
ADDITIONS ---------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OTHER PERIOD - ----------------------------------------------------------------------------------------------------------Allowance for Doubtful Accounts - ---------------------- 2000 $2,836 $ 275 - $ (624)(a) $(337)(c) $2,150 1999 2,583 1,050 - (797)(a) $2,836 1998 1,940 1,245 - (602)(a) 2,583 Reserve for Inventory Obsolescence - ---------------------- 2000 $3,955 $ 785 - $(1,031)(b) $3,709 1999 2,860 $1,545 - (450)(b) $3,955 1998 1,873 992 - (5)(b) 2,860(a) Specific write-offs (b) Specific dispositions (c) Reversal of specific write-offs due to collection 182152
EXHIBIT INDEX
EXHIBIT NUMBER - --------------Exhibit Number 3A Articles of Organization of the Company effective January 8, 1981, as amended June 8, 1982, August 19, 1983, May 15, 1984, April 17, 1985, November 4, 1986, and January 21, 1987 (incorporated by reference to Exhibit 3A to the Registration Statement Form S-1 [Registration No. 33-29020]) 3B Restated Articles of Organization of the Company effective June 27, 1989, as amended April 30, 1991, April 21, 1992, April 25, 1995, and April 23, 1996 (filed as Exhibit 3B to the Company'sCompany’s Annual Reportofon Form 10-K for the year ended December 31, 1996)3C By-laws of the Company as amended February 9, 1990 (filed as Exhibit 3C to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 1990)4 Specimen Certificate for Shares of Common Stock (incorporated by reference to Exhibit 4 to the Registration Statement Form S-1 [Registration No. 33-29020]) 10A Cognex Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 4A to Amendment No. 1 to the Registration Statement Form S-8 [Registration No. 33-32815]) 10B Cognex Corporation 1992 Director Stock Option Plan (filed as Exhibit 10I to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 1992)10C Cognex Corporation 1993 Director Stock Option Plan (filed as Exhibit 10J to the Company'sCompany’s Annual Report on Form10C10-K for the year ended December 31, 1993)10D Cognex Corporation 1993 Employee Stock Option Plan, as amended May 28, 1996 (incorporated by reference to Exhibit 4A to the Registration Form S-8 [Registration No. 333-4621]) 10E Cognex Corporation 1996 Long-Term Incentive Plan (incorporated by reference to Exhibit 4A to the Registration Statement Form S-8 [Registration No. 333-2151]) 10F Amendment to the Cognex Corporation 1993 Director Stock Option Plan (filed as Exhibit 10G to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 1997)10G Amendment to the Cognex Corporation 1993 Employee Stock Option Plan (filed as Exhibit 10H to the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 1997)10H Cognex Corporation 1998 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 4.1 to the Registration Form S-8 [Registration No. 333-60807]) 10I Cognex Corporation 1998 Stock Incentive Plan (incorporated by reference to Exhibit 4.2 to the Registration Form S-8 [Registration No. 333-60807]) 13 Annual Report to Stockholders for the year ended December 31, 2000 (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K) *21 Subsidiaries of the registrant * 23 Consent of PricewaterhouseCoopers LLP * * Filed herewith1953