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COGNEX CORP - Quarter Report: 2003 June (Form 10-Q)

COGNEX CORPORATION
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

     [X]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 29, 2003 or

     [  ]  Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ____________

Commission File Number 0-17869

COGNEX CORPORATION


(Exact name of registrant as specified in its charter)
     
Massachusetts

(State or other jurisdiction of
incorporation or organization)
  04-2713778

(I.R.S. Employer
Identification No.)

One Vision Drive
Natick, Massachusetts 01760-2059
(508) 650-3000


(Address, including zip code, and telephone number,
including area code, of principal executive offices)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

             
Yes   [X]   No   [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

             
Yes   [X]   No   [  ]

     As of July 27, 2003, there were 43,232,416 shares of Common Stock, $.002 par value, of the registrant outstanding.



 


TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4: CONTROLS AND PROCEDURES
PART II: OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
ITEM 2.CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER
EX-32.1 CERTIFICATION TO SECTION 906 (CEO)
EX-32.2 CERTIFICATION TO SECT. 906 (CFO)


Table of Contents

INDEX

     
PART I
 
FINANCIAL INFORMATION
Item 1.
 
Financial Statements
 
 
Consolidated Statements of Operations for the three-month and six-month periods ended June 29, 2003 and June 30, 2002
 
 
Consolidated Balance Sheets at June 29, 2003 and December 31, 2002
 
 
Consolidated Statement of Stockholders’ Equity for the six-month period ended June 29, 2003
 
 
Consolidated Condensed Statements of Cash Flows for the six-month periods ended June 29, 2003 and June 30, 2002
 
 
Notes to Consolidated Financial Statements
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
 
Controls and Procedures
PART II
 
OTHER INFORMATION
Item 1.
 
Legal Proceedings
Item 2.
 
Changes in Securities and Use of Proceeds
Item 3.
 
Defaults Upon Senior Securities
Item 4.
 
Submission of Matters to a Vote of Security Holders
Item 5.
 
Other Information
Item 6.
 
Exhibits and Reports on Form 8-K
 
 
Signatures
 
 
Certifications

 


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

COGNEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

                                   
      Three Months Ended   Six Months Ended
      June 29,   June 30,   June 29,   June 30,
      2003   2002   2003   2002
     
 
 
 
      (unaudited)   (unaudited)
Revenue
                               
 
Product
  $ 31,391     $ 22,406     $ 59,639     $ 39,662  
 
Service
    5,231       4,265       9,871       8,789  
 
 
   
     
     
     
 
 
    36,622       26,671       69,510       48,451  
Cost of revenue
                               
 
Product
    8,995       6,282       17,865       12,111  
 
Service
    3,004       2,946       5,850       5,682  
 
 
   
     
     
     
 
 
    11,999       9,228       23,715       17,793  
Gross margin
                               
 
Product
    22,396       16,124       41,774       27,551  
 
Service
    2,227       1,319       4,021       3,107  
 
 
   
     
     
     
 
 
    24,623       17,443       45,795       30,658  
Research, development, and engineering expenses
    6,263       6,498       12,246       12,850  
Selling, general, and administrative expenses
    13,949       14,704       27,193       27,422  
 
 
   
     
     
     
 
Operating income (loss)
    4,411       (3,759 )     6,356       (9,614 )
Foreign currency gain (loss)
    (1,164 )     471       (1,791 )     164  
Investment and other income (loss)
    1,615       (3,963 )     2,909       (1,402 )
 
 
   
     
     
     
 
Income (loss) before provision (benefit) for income taxes
    4,862       (7,251 )     7,474       (10,852 )
Income tax provision (benefit)
    1,556       (2,539 )     2,375       (3,620 )
 
 
   
     
     
     
 
Net income (loss)
  $ 3,306     $ (4,712 )   $ 5,099     $ (7,232 )
 
 
   
     
     
     
 
Net income (loss) per common and common-equivalent share:
                               
 
Basic
  $ .08     $ (.11 )   $ .12     $ (.16 )
 
 
   
     
     
     
 
 
Diluted
  $ .08     $ (.11 )   $ .12     $ (.16 )
 
 
   
     
     
     
 
Weighted-average common and common-equivalent shares outstanding:
                               
 
Basic
    42,749       44,172       42,736       44,072  
 
 
   
     
     
     
 
 
Diluted
    43,678       44,172       43,640       44,072  
 
 
   
     
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

COGNEX CORPORATION
CONSOLIDATED BALANCE SHEETS

(In thousands)

                     
        June 29,   December 31,
        2003   2002
       
 
        (unaudited)        
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 51,442     $ 60,864  
 
Short-term investments
    61,709       75,769  
 
Accounts receivable, less reserves of $2,261 and $2,207 in 2003 and 2002, respectively
    25,846       18,981  
 
Inventories
    16,598       18,952  
 
Deferred income taxes
    9,875       9,969  
 
Prepaid expenses and other current assets
    11,319       9,256  
 
 
   
     
 
   
Total current assets
    176,789       193,791  
Long-term investments
    167,200       139,352  
Property, plant, and equipment, net
    25,862       27,405  
Deferred income taxes
    16,756       16,608  
Intangible assets, net
    5,780       919  
Goodwill, net
    5,360       3,742  
Other assets
    3,668       3,686  
 
 
   
     
 
 
  $ 401,415     $ 385,503  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 3,393     $ 3,496  
 
Accrued expenses
    24,840       19,972  
 
Customer deposits
    4,911       3,659  
 
Deferred revenue
    6,088       3,856  
 
 
   
     
 
   
Total current liabilities
    39,232       30,983  
Commitments (Notes 3, 7, 8, and 9)
               
Stockholders’ equity:
               
 
Common stock, $.002 par value –
               
   
Authorized: 140,000 shares, issued: 47,210 and 46,877 shares in 2003 and 2002, respectively
    94       94  
 
Additional paid-in capital
    189,995       184,595  
 
Treasury stock, at cost, 4,249 shares
    (72,306 )     (72,311 )
 
Retained earnings
    253,109       248,010  
 
Accumulated other comprehensive loss
    (8,709 )     (5,868 )
 
 
   
     
 
   
Total stockholders’ equity
    362,183       354,520  
 
   
     
 
 
  $ 401,415     $ 385,503  
 
   
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

COGNEX CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

                                                     
                                                 
        Common Stock   Additional   Treasury Stock    
       
    Paid-in    
    Retained  
        Shares   Par Value   Capital   Shares   Cost   Earnings
       
 
 
 
 
 
Balance at December 31, 2002
    46,877     $ 94     $ 184,595       4,249     $ (72,311 )   $ 248,010  
 
Issuance of stock under stock option, stock purchase, and other plans
    333             4,488             5          
 
Tax benefit from exercise of stock options
                    912                          
 
Comprehensive income:
                                               
   
Net income
                                            5,099  
   
Losses on foreign intercompany loans, net of gains on cross currency swaps, net of tax of $259
                                               
   
Foreign currency translation adjustment
                                               
 
                                               
   
Comprehensive income
                                               
 
   
     
     
     
     
     
 
Balance at June 29, 2003 (unaudited)
    47,210     $ 94     $ 189,995       4,249     $ (72,306 )   $ 253,109  
 
   
     
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]

                             
        Accumulated                
        Other           Total
        Comprehensive   Comprehensive   Stockholders’
        Loss   Income   Equity
       
 
 
Balance at December 31, 2002
  $ (5,868 )           $ 354,520  
 
Issuance of stock under stock option, stock purchase, and other plans
                    4,493  
 
Tax benefit from exercise of stock options
                    912  
 
Comprehensive income:
                       
   
Net income
          $ 5,099       5,099  
   
Losses on foreign intercompany loans, net of gains on cross currency swaps, net of tax of $259
    (440 )     (440 )     (440 )
   
Foreign currency translation adjustment
    (2,401 )     (2,401 )     (2,401 )
 
           
         
   
Comprehensive income
          $ 2,258          
 
   
     
     
 
Balance at June 29, 2003 (unaudited)
  $ (8,709 )           $ 362,183  
 
   
             
 

The accompanying notes are an integral part of these consolidated financial statements.

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COGNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

                     
        Six Months Ended
        June 29,   June 30,
        2003   2002
       
 
        (unaudited)
Cash flows from operating activities:
               
 
Net income (loss)
  $ 5,099     $ (7,232 )
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
   
Depreciation and amortization
    5,057       4,738  
   
Tax benefit from exercise of stock options
    912       1,536  
   
Loss on sale of equity securities
          6,184  
   
Deferred income tax benefit (expense)
    233       (1,591 )
   
Change in current assets and current liabilities
    (1,182 )     (1,755 )
   
Other
    530       535  
 
 
   
     
 
 
Net cash provided by operating activities
    10,649       2,415  
Cash flows from investing activities:
               
 
Purchase of investments
    (104,313 )     (44,615 )
 
Maturity and sale of investments
    88,237       46,594  
 
Purchase of property, plant, and equipment
    (1,140 )     (1,331 )
 
Cash paid for business acquisitions
    (7,630 )     (349 )
 
 
   
     
 
 
Net cash provided by (used in) investing activities
    (24,846 )     299  
Cash flows from financing activities:
               
 
Issuance of stock under stock option, stock purchase, and other plans
    4,493       2,869  
 
 
   
     
 
 
Net cash provided by financing activities
    4,493       2,869  
Effect of foreign exchange rate changes on cash
    282       (3,160 )
 
 
   
     
 
Net increase (decrease) in cash and cash equivalents
    (9,422 )     2,423  
Cash and cash equivalents at beginning of period
    60,864       31,660  
 
 
   
     
 
Cash and cash equivalents at end of period
  $ 51,442     $ 34,083  
 
   
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: Summary of Significant Accounting Policies

As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

In the opinion of the management of Cognex Corporation, the accompanying consolidated unaudited financial statements contain all adjustments necessary to present fairly the Company’s financial position at June 29, 2003, and the results of its operations for the three-month and six-month periods ended June 29, 2003 and June 30, 2002, and changes in stockholders’ equity and cash flows for the periods presented.

The results disclosed in the Consolidated Statements of Operations for the three-month and six-month periods ended June 29, 2003 are not necessarily indicative of the results to be expected for the full year. Certain amounts reported in prior periods have been reclassified to be consistent with the current period presentation.

Stock-Based Compensation Plans

The Company recognizes compensation costs using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Net income (loss) and net income (loss) per share as reported in these consolidated financial statements and on a pro forma basis, as if the fair value based method described in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” had been adopted, are as follows:

                                 
    Three Months Ended   Six Months Ended
    June 29,   June 30,   June 29, June 30,
    2003   2002   2003   2002
   
 
 
 
Net income (loss), as reported
  $ 3,306     $ (4,712 )   $ 5,099     $ (7,232 )
Less: Total stock-based compensation costs determined under fair value based method, net of tax
    (3,859 )     (4,895 )     (7,008 )     (9,870 )
 
   
     
     
     
 
Net loss, pro forma
  $ (553 )   $ (9,607 )   $ (1,909 )   $ (17,102 )
 
   
     
     
     
 
Basic net income (loss) per share, as reported
  $ .08     $ (.11 )   $ .12     $ (.16 )
Basic net loss per share, pro forma
  $ (.01 )   $ (.22 )   $ (.04 )   $ (.39 )
Diluted net income (loss) per share, as reported
  $ .08     $ (.11 )   $ .12     $ (.16 )
Diluted net loss per share, pro forma
  $ (.01 )   $ (.22 )   $ (.04 )   $ (.39 )

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Table of Contents

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: Summary of Significant Accounting Policies (continued)

For the purpose of providing pro forma disclosures, the fair values of stock options granted were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

                                 
    Three Months Ended   Six Months Ended
    June 29,   June 30,   June 29,   June 30,
    2003   2002   2003   2002
   
 
 
 
Risk-free interest rate
    2.0 %     3.6 %     2.0 %     3.5 %
Expected life (in years)
    2.8       3.3       2.8       2.8  
Expected volatility
    58 %     60 %     58 %     60 %
Expected dividends
    1.09 %           1.09 %      

NOTE 2: New Pronouncements

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This issue addresses how revenue arrangements with multiple deliverables should be divided into separate units of accounting and how the arrangement consideration should be allocated to the identified separate accounting units. EITF Issue No. 00-21 is effective for fiscal periods beginning after June 15, 2003. The Company does not believe the adoption of EITF Issue No. 00-21 will have a material impact on its consolidated financial statements.

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities, and activities of another entity. Previously, a company generally has included other entities in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that guidance by requiring variable interest entities, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns. Interpretation No. 46 also requires disclosure about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not believe the adoption of Interpretation No. 46 will have a material impact on its consolidated financial statements.

On May 15, 2003, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. The provisions of SFAS No. 150 are effective for public companies for all financial instruments created or modified after May 31, 2003, and to other instruments at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe the adoption of SFAS No. 150 will have a material impact on its consolidated financial statements.

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Table of Contents

COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3: Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments consist of the following:
(In thousands)

                   
      June 29,   December 31,
      2003   2002
     
 
Cash
  $ 44,002     $ 58,424  
Municipal obligations
    7,440       2,440  
 
   
     
 
 
Total cash and cash equivalents
    51,442       60,864  
 
   
     
 
Municipal obligations
    61,709       75,769  
 
   
     
 
 
Total short-term investments
    61,709       75,769  
 
   
     
 
Municipal obligations
    157,775       131,425  
Investment in limited partnership
    9,425       7,927  
 
   
     
 
 
Total long-term investments
    167,200       139,352  
 
   
     
 
 
  $ 280,351     $ 275,985  
 
   
     
 

On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock Associates III, L.P., a venture capital fund. A director of the Company is a Managing General Partner of Venrock Associates. The Company has committed to a total investment in the limited partnership of up to $25,000,000, of which $12,375,000 and $10,375,000 had been contributed as of June 29, 2003 and December 31, 2002, respectively. The commitment to contribute capital expires on January 1, 2005, and the Company does not have the right to withdraw from the partnership prior to December 31, 2010.

During the six-month period ended June 29, 2003, the Company recorded $502,000 in realized losses on the fund’s investments and fund expenses that were not offset by investment gains.

NOTE 4: Inventories

Inventories consist of the following:
(In thousands)

                 
    June 29,   December 31,
    2003   2002
   
 
Raw materials
  $ 9,913     $ 12,530  
Work-in-process
    4,783       4,068  
Finished goods
    1,902       2,354  
 
   
     
 
 
  $ 16,598     $ 18,952  
 
   
     
 

In the fourth quarter of 2001, the Company recorded a $16,300,000 charge in “Cost of product revenue” on the Consolidated Statements of Operations for excess inventories and purchase commitments resulting from an extended slowdown in the semiconductor and electronics industries, as well as the expected transition to newer Cognex hardware platforms by the Company’s OEM customers. A total of $12,500,000 of this charge represented reserves against existing inventories and was accordingly included in “Inventories” on the Consolidated Balance Sheet at December 31, 2001. The remaining $3,800,000 of the charge represented commitments to purchase excess components and systems from various suppliers and accordingly was included in “Accrued Expenses” on the Consolidated Balance Sheet at December 31, 2001.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4: Inventories (continued)

The following table summarizes the changes in the inventory-related reserves established in the fourth quarter of 2001 (in thousands):

                         
    Balance Sheet   Statement of
Operations
   
 
            Accrued    
    Inventories   Expenses   Benefits
   
 
 
Initial charge in the fourth quarter of 2001
  $ 12,500     $ 3,800     $  
Inventory sold to customers
    (1,790 )           1,790  
Settlement of purchase commitments
    1,506       (2,400 )     894  
 
   
     
     
 
Reserve balance at December 31, 2002
    12,216       1,400          
Benefits to cost of product revenue recorded in 2002
                  $ 2,684  
 
                   
 
Inventory sold to customers
    (878 )         $ 878  
Inventory sold to brokers
    (438 )            
Write-off and scrap of inventory
    (474 )            
 
   
     
     
 
Reserve balance at June 29, 2003
  $ 10,426     $ 1,400          
 
   
     
         
Benefits to cost of product revenue recorded in 2003
                  $ 878  
 
                   
 

The Company is in the process of negotiating with vendors for the settlement of the remaining purchase commitments, which may result in a recovery of a portion of the remaining $1,400,000 accrued at June 29, 2003.

NOTE 5: Intangible Assets

Amortized intangible assets consist of the following (in thousands):

                           
      Gross           Net
      Carrying   Accumulated   Carrying
      Amount   Amortization   Amount
     
 
 
June 29, 2003
                       
 
Customer contracts and relationships
  $ 4,625     $ 145     $ 4,480  
 
Complete technology
    5,177       4,017       1,160  
 
Patents
    103       5       98  
 
Non-compete agreements
    839       797       42  
 
 
   
     
     
 
 
  $ 10,744     $ 4,964     $ 5,780  
 
 
   
     
     
 
December 31, 2002
                       
 
Complete technology
  $ 4,708     $ 3,789     $ 919  
 
Non-compete agreements
    793       793        
 
 
   
     
     
 
 
  $ 5,501     $ 4,582     $ 919  
 
 
   
     
     
 

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5: Intangible Assets (continued)

Aggregate amortization expense for the three-month and six-month periods ended June 29, 2003 was $280,000 and $382,000, respectively, and $138,000 and $277,000 for the same periods in 2002.

Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows (in thousands):

           
 Year   Amount

 
 
2003
  $ 939  
 
2004
    1,116  
 
2005
    810  
 
2006
    696  
 
2007
    693  
     Thereafter
    1,908  
 
   
 
 
Total
  $ 6,162  
 
   
 

NOTE 6: Goodwill

The Company has two reporting units with goodwill, the Modular Vision Systems Division (MVSD) and the Surface Inspection Systems Division (SISD), which are also reportable segments.

The changes in the carrying amount of goodwill during the six-month period ended June 29, 2003 are as follows (in thousands):

                         
    MVSD   SISD   Consolidated
   
 
 
Balance at December 31, 2002
  $ 1,488     $ 2,254     $ 3,742  
Business acquisition (Note 12)
    1,353             1,353  
Foreign exchange rate changes
    66       199       265  
 
   
     
     
 
Balance at June 29, 2003
  $ 2,907     $ 2,453     $ 5,360  
 
   
     
     
 

The Company evaluates the possible impairment of goodwill annually each fourth quarter, and whenever events or circumstances indicate that the carrying value of the goodwill may not be recoverable. In the fourth quarter of 2002, this analysis resulted in a fair value of each reporting unit that exceeded its carrying amount, and therefore, the goodwill in each reporting unit was determined not to be impaired. No events or circumstances have occurred during 2003 that would indicate an impairment of goodwill.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7: Warranty Obligations

The Company warrants its hardware products to be free from defects in material and workmanship for periods ranging from six months to two years from the time of sale based upon the product being purchased and the terms of the customer’s contract. Estimated warranty obligations are evaluated and recorded at the time of sale based upon historical costs to fulfill warranty obligations. Warranty obligations are included in “Accrued expenses” on the Consolidated Balance Sheets.

The changes in the warranty obligation are as follows (in thousands):

         
Balance at December 31, 2002
  $ 1,523  
Provisions for warranties issued during the period
    775  
Provisions related to pre-existing warranties
    550  
Fulfillment of warranty obligations
    (839 )
Foreign exchange rate changes
    83  
 
   
 
Balance at June 29, 2003
  $ 2,092  
 
   
 

NOTE 8: Indemnification Provisions

Except as limited by Massachusetts law, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. The maximum potential amount of future payments the Company could be required to make under these provisions is unlimited. The Company has never incurred significant costs related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is minimal and has not recorded any related liabilities as of June 29, 2003.

The Company accepts standard limited indemnification provisions in the ordinary course of business, whereby it indemnifies its customers for certain direct damages incurred in connection with third-party patent or other intellectual property infringement claims with respect to the use of the Company’s products. The term of these indemnification provisions generally coincides with the customer’s use of the Company’s products. The maximum potential amount of future payments the Company could be required to make under these provisions is always subject to fixed monetary limits. The Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is minimal and has not recorded any related liabilities as of June 29, 2003.

The Company also accepts limited indemnification provisions from time to time, whereby it indemnifies customers for certain direct damages incurred in connection with bodily injury and property damage arising from the installation of the Company’s products. The term of these indemnification provisions generally coincides with the period of installation. The maximum potential amount of future payments the Company could be required to make under these provisions is limited and is recoverable under the Company’s insurance policies. As a result of this coverage, and the fact that the Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions, the Company believes the estimated fair value of these provisions is minimal and has not recorded any related liabilities as of June 29, 2003.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9: Bank Guarantees

On May 27, 2003, the Company provided bank guarantees totaling 3,051,000,000 Yen (or approximately $25,494,000 based upon the exchange rate at June 29, 2003) to taxing authorities in Japan. The Tokyo Regional Taxation Bureau (TRTB) has asserted that Cognex Corporation has a permanent establishment in Japan that would require certain income, previously reported on U.S. tax returns for the years ended December 31, 1997 through December 31, 2001, to be subject instead to taxation in Japan. The Company disagrees with this position and believes that this assertion is inconsistent with principles under the U.S. – Japan income tax treaty. The Company has filed a notice of objection and request for deferral of tax payment and intends to contest this assessment vigorously, although no assurances can be made that the Company will prevail in this matter. Until this matter is decided, the Company is required to provide bank guarantees to collateralize these tax assessments. These guarantees expire in approximately one year. Should the TRTB prevail in its assertion, the income in question would be taxable in Japan and the Company would be required to pay approximately $25,494,000 in taxes, interest, and penalties to Japanese taxing authorities. The Company would then be entitled to recoup the majority of this amount from taxing authorities in the U.S.

NOTE 10: Net Income (Loss) Per Share

Net income (loss) per share is calculated as follows:

                                   
      Three Months Ended   Six Months Ended
      June 29,   June 30,   June 29,   June 30,
(In thousands, except per share amounts)   2003   2002   2003   2002

 
 
 
 
Net income (loss)
  $ 3,306     $ (4,712 )   $ 5,099     $ (7,232 )
 
   
     
     
     
 
Basic:
                               
 
Weighted-average common shares outstanding
    42,749       44,172       42,736       44,072  
 
   
     
     
     
 
 
Net income (loss) per common share
  $ .08     $ (.11 )   $ .12     $ (.16 )
 
   
     
     
     
 
Diluted:
                               
 
Weighted-average common shares outstanding
    42,749       44,172       42,736       44,072  
 
Effect of dilutive stock options
    929             904        
 
   
     
     
     
 
 
Weighted-average common and common-equivalent shares outstanding
    43,678       44,172       43,640       44,072  
 
   
     
     
     
 
 
Net income (loss) per common and common-equivalent share
  $ .08     $ (.11 )   $ .12     $ (.16 )
 
   
     
     
     
 

Stock options to purchase 4,617,831 and 4,612,832 shares of common stock were outstanding for the three-month and six-month periods ended June 29, 2003, respectively, and 4,011,987 and 3,221,247 for the same periods in 2002, but were not included in the calculation of diluted net income (loss) per share because the options’ exercise prices were greater than the average market price of the Company’s common stock during those periods. Additionally, stock options to purchase 1,391,124 and 1,452,142 shares of common stock were not included in the calculation of diluted net loss per share for the three-month and six-month periods ended June 30, 2002, respectively, because they were antidilutive.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11: Segment Information

The Company has two reportable segments: the Modular Vision Systems Division (MVSD) and the Surface Inspections Systems Division (SISD). MVSD designs, develops, manufactures, and markets modular vision systems that are used to control the manufacturing of discrete items by locating, identifying, inspecting, and measuring them during the manufacturing process. SISD designs, develops, manufactures, and markets surface inspection vision systems that are used to inspect surfaces of materials that are processed in a continuous fashion to ensure there are no flaws or defects in the surfaces. Segments are determined based upon the way that management organizes its business for making operating decisions and assessing performance. The Company evaluates segment performance based upon income or loss from operations, excluding unusual items.

The following table summarizes information about the Company’s segments (in thousands):

                                   
                      Reconciling        
      MVSD   SISD   Items   Consolidated
     
 
 
 
Three Months Ended June 29, 2003
                               
 
Product revenue
  $ 25,624     $ 5,767     $     $ 31,391  
 
Service revenue
    3,559       1,672             5,231  
 
Operating income
    4,140       1,177       (906 )     4,411  
Six Months Ended June 29, 2003
                               
 
Product revenue
  $ 49,152     $ 10,487     $     $ 59,639  
 
Service revenue
    6,660       3,211             9,871  
 
Operating income
    7,188       1,691       (2,523 )     6,356  
Three Months Ended June 30, 2002
                               
 
Product revenue
  $ 17,424     $ 4,982     $     $ 22,406  
 
Service revenue
    2,912       1,353             4,265  
 
Operating income (loss)
    (2,503 )     724       (1,980 )     (3,759 )
Six Months Ended June 30, 2002
                               
 
Product revenue
  $ 31,415     $ 8,247     $     $ 39,662  
 
Service revenue
    5,983       2,806             8,789  
 
Operating income (loss)
    (5,974 )     622       (4,262 )     (9,614 )

Reconciling items include benefits from the sale of previously reserved inventory, which relate to the MVSD segment and are not included in the segment’s operating income (loss) for the purpose of making operating decisions and assessing performance. Reconciling items also consist of unallocated corporate expenses, which primarily include corporate headquarters costs and patent infringement litigation. Asset information by segment is not produced internally, and therefore, is not presented.

NOTE 12: Acquisition of Siemens Dematic AG Wafer Identification Business

On March 31, 2003, the Company acquired the wafer identification business of Siemens Dematic AG, a subsidiary of Siemens AG. Siemens Dematic is a leading supplier of logistics and factory automation equipment and has been a leading supplier of wafer identification systems to semiconductor manufacturers in Europe. Under the terms of the agreement, the Company acquired the rights to all of Siemens’ patented and unpatented wafer identification technology, as well as substantially all of the assets related to its wafer identification business. This acquisition enhances the Company’s position as a leading

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12: Acquisition of Siemens Dematic AG Wafer Identification Business (continued)

provider of wafer identification systems worldwide. The results of operations of the acquired business have been included in the Company’s consolidated results of operations since the date of the acquisition. The historical results of operations of the acquired business were not material compared to the consolidated results of operations, and therefore, pro forma results are not presented.

The purchase price consisted of 7,000,000 Euros in cash (or $7,630,000) paid on March 31, 2003, with the potential for an additional cash payment in 2005 of up to 1,700,000 Euros (or approximately $1,943,000 based upon the exchange rate at June 29, 2003) depending upon the achievement of certain performance criteria. The contingent consideration will be recorded as purchase price when paid and will be allocated to goodwill. The March 31, 2003 cash payment of 7,000,000 Euros was based upon an estimated balance sheet for the wafer identification business as of March 31, 2003. The Company is in the process of reviewing the actual March 31, 2003 balance sheet and the cash payment may be adjusted during the third quarter of 2003 based upon the outcome of this review, with such adjustment allocated to goodwill.

The purchase price was allocated as follows: $616,000 to inventories; $628,000 to receivables; $25,000 to accrued expenses; $4,469,000 to customer contracts and relationships, to be amortized over eight years; $447,000 to complete technology, to be amortized over five years; $98,000 to patents, to be amortized over five years; $44,000 to non-compete agreements, to be amortized over three years; and $1,353,000 to goodwill, assigned to the MVSD segment, none of which is deductible for tax purposes.

NOTE 13: Subsequent Event

On August 5, 2003, the Company’s Board of Directors declared a quarterly cash dividend of $0.06 per share. The dividend is payable on September 19, 2003 to all shareholders of record at the close of business on August 29, 2003. Future dividends will be declared at the discretion of the Board of Directors and will depend upon such factors as the Board of Directors deems relevant. The Board of Directors may modify the Company’s dividend policy from time to time.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements made in this report, as well as oral statements made by the Company from time to time, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these forward-looking statements by the Company’s use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” and similar words and other statements of a similar sense. These statements are based upon the Company’s current 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 known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) the effects of the general economic slowdown, including the worldwide slowdown in capital spending and the uncertainty of the timing and rate of recovery; (2) the cyclicality of the semiconductor and electronics industries; (3) the Company’s continued ability to achieve significant international revenue; (4) the loss of, or a significant curtailment of purchases by, any one or more principal customers; (5) the reliance upon certain sole source suppliers to manufacture or deliver critical components for the Company’s products; (6) the inability to design and manufacture high-quality products; (7) the inability to attract or retain skilled employees; (8) the inability to forecast customer demand accurately; (9) the technological obsolescence of current products and the inability to develop new products; (10) the inability to protect the Company’s proprietary technology and intellectual property; (11) the Company’s involvement in time-consuming and costly litigation; (12) the inability to respond to competitive technology and pricing pressures; (13) changes in foreign exchange rates; and (14) the inability to achieve expected results from acquisitions. The foregoing list should not be construed as exhaustive and the Company encourages readers to refer to the discussion of risk factors included in Part I - Item 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to subsequently revise forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Results of Operations

Revenue

Revenue for the three-month and six-month periods ended June 29, 2003 totaled $36,622,000 and $69,510,000, respectively, compared to $26,671,000 and $48,451,000 for the same periods in 2002, representing a 37% increase for the three-month period and a 43% increase for the six-month period. Sales to Original Equipment Manufacturers (OEM) customers, most of whom make capital equipment used by manufacturers in the semiconductor and electronics industries, increased $4,452,000, or 52%, from the three-month period in 2002 and $11,393,000, or 82%, from the six-month period in 2002. Sales to end-user customers increased $5,499,000, or 30%, from the three-month period in 2002 and $9,666,000, or 28%, from the six-month period in 2002, due to higher demand from customers across a variety of industries. Sales to end-user customers represented 65% and 64% of total revenue for the three-month and six-month periods ended June 29, 2003 compared to 68% and 71% for the same periods in 2002. Geographically, the increase in revenue from the prior year was most significant in Japan, where many of the Company’s OEM customers are located.

Product revenue for the three-month and six-month periods ended June 29, 2003 totaled $31,391,000 and $59,639,000, respectively, compared to $22,406,000 and $39,662,000 for the same periods in 2002, representing a 40% increase for the three-month period and a 50% increase for the six-month period. The increase in product revenue was primarily due to a higher volume of machine vision systems sold to customers in the semiconductor, electronics, automotive, paper, and other industries. Service revenue, which is derived from the sale of maintenance and support, education, consulting, and installation services, totaled $5,231,000 and $9,871,000 for the three-month and six-month periods ended June 29, 2003, respectively, compared to $4,265,000 and $8,789,000 for the same periods in 2002, representing a

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23% increase for the three-month period and a 12% increase for the six-month period. Many of the Company’s products that were sold during 2003 included bundled maintenance and support programs for which a portion of the revenue will be recognized in future quarters over the program period. As a result, service revenue did not increase as dramatically as product revenue, and it decreased as a percentage of total revenue to 14% for the three-month and six-month periods ended June 29, 2003 compared to 16% and 18% for the same periods in 2002.

MVSD revenue for the three-month and six-month periods ended June 29, 2003 totaled $29,183,000 and $55,812,000, respectively, compared to $20,336,000 and $37,398,000 for the same periods in 2002, representing a 44% increase for the three-month period and a 49% increase for the six-month period. The increase in MVSD revenue was primarily due to a higher volume of systems sold to customers in the semiconductor, electronics, and automotive industries. SISD revenue for the three-month and six-month periods ended June 29, 2003 totaled $7,439,000 and $13,698,000, respectively, compared to $6,335,000 and $11,053,000 for the same periods in 2002, representing a 17% increase for the three-month period and a 24% increase for the six-month period. The increase in SISD revenue was due principally to a higher volume of SmartView® systems sold to customers in the paper and metals industries.

Gross Margin

Gross margin as a percentage of revenue was 67% and 66% for the three-month and six-month periods ended June 29, 2003, respectively, compared to 65% and 63% for the same periods in 2002. The increase in gross margin was primarily due to the impact of the higher sales volume, as well as a greater percentage of total revenue from the sale of modular vision systems, which carry higher margins than the sale of services and surface inspection systems. This increase was partially offset by a lower amount of benefits recorded to “Cost of product revenue” in 2003 from the sale of previously reserved inventory. These benefits amounted to $569,000 and $878,000 for the three-month and six-month periods ended June 29, 2003, respectively, compared to $1,000,000 for the same periods in 2002.

Product gross margin as a percentage of revenue was 71% and 70% for the three-month and six-month periods ended June 29, 2003, respectively, compared to 72% and 69% for the same periods in 2002. The decrease in product margin for the three-month period was primarily due to the decreased benefit from the sale of previously reserved inventory, offset by the favorable absorption of manufacturing overhead due to the increased sales volume and the shift in product mix to higher-margin modular vision systems. For the six-month period, the favorable impact of sales volume and revenue mix offset the decreased benefit from the sale of previously reserved inventory, resulting in an increase in the product margin. Service gross margin as a percentage of revenue was 43% and 41% for the three-month and six-month periods ended June 29, 2003, respectively, compared to 31% and 35% for the same periods in 2002. The increase in service margin was due principally to higher maintenance and support revenue that is sold bundled with MVSD products, while costs were held essentially flat.

MVSD gross margin as a percentage of revenue was 71% for the three-month period ended June 29, 2003, which was consistent with the same period in 2002. MVSD gross margin for the six-month period ended June 29, 2003 was 70%, compared to 69% for the same period in 2002. The increase in MVSD margin was primarily due to the impact of the higher sales volume of modular vision systems, offset by the decreased benefit from the sale of previously reserved inventory. SISD gross margin as a percentage of revenue was 51% and 49% for the three-month and six-month periods ended June 29, 2003, respectively, compared to 46% and 44% for the same periods in 2002. The increase in SISD margin was due principally to the impact of the higher sales volume of surface inspection systems.

Operating Expenses

Research, development, and engineering expenses (R,D,&E) for the three-month and six-month periods ended June 29, 2003 were $6,263,000 and $12,246,000, respectively, compared to $6,498,000 and $12,850,000 for the same periods in 2002, representing a 4% decrease for the three-month period and a 5% decrease for the six-month period. MVSD R,D&E expenses for the three-month and six-month periods ended June 29, 2003 decreased 6% and 7%, respectively, from the same periods in 2002 primarily due to a workforce reduction in the third quarter of 2002. SISD R,D&E expenses for the three- month and six-month periods ended June 29, 2003 increased 24% and 18%, respectively, from the same

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periods in 2002 principally due to an increase in spending on software translation services and other activities related to the SmartView® product line.

Selling, general, and administrative (S,G&A) expenses for the three-month and six-month periods ended June 29, 2003 were $13,949,000 and $27,193,000, respectively, compared to $14,704,000 and $27,422,000 for the same periods in 2002, representing a 5% decrease for the three-month period and a 1% decrease for the six-month period. MVSD S,G&A expenses for the three-month and six-month periods ended June 29, 2003 increased 5% from the same periods in 2002, while SISD S,G&A expenses increased 17% for the three-month period and 20% for the six-month period. The increase in MVSD and SISD expenses was primarily due to the unfavorable impact of foreign exchange rate changes on the Company’s international operations, as well as higher marketing costs undertaken to increase sales opportunities. Corporate expenses that are not allocated to a division decreased 51% for the three-month period and 35% for the six-month period primarily due to lower legal costs associated with patent infringement lawsuits initiated by the Company to protect its intellectual property, as well as a $604,000 expense in the second quarter of 2002 related to the acquisition of the web inspection business of Honeywell International Inc.

Foreign Currency Gain (Loss)

During the three-month and six-month periods ended June 29, 2003, the Company recorded foreign currency losses of $1,164,000 and $1,791,000, compared to gains of $471,000 and $164,000 for the same periods in 2002. The increase in foreign currency losses was primarily due to the revaluation and settlement of accounts receivable denominated in currencies other than the subsidiary’s functional currency.

Investment and Other Income (Loss)

Investment and other income for the three-month and six-month periods ended June 29, 2003 totaled $1,615,000 and $2,909,000, respectively, compared to losses of $3,963,000 and $1,402,000 for the same periods in 2002. The increase in investment and other income was primarily due to $6,184,000 in losses recorded by the Company from the sale of equity securities in the second quarter of 2002. Excluding these losses, investment and other income decreased principally due to lower average interest rates on the Company’s portfolio of debt securities, as well as lower average investment balances as a result of using $26,425,000 in cash to repurchase common stock during the third quarter of 2002 and $7,630,000 in cash to acquire the wafer identification business of Siemens Dematic AG on March 31, 2003.

Income Taxes

The Company’s effective tax rate for the three-month and six-month periods ended June 29, 2003 was a provision of 32% compared to benefits of 35% and 33% for the same periods in 2002. The provision reflects the Company’s significant tax-exempt investment income and future reductions in taxes payable relating to net operating loss carryforwards in various jurisdictions, offset by continued investments in the Company’s foreign operations and losses related to an investment in a limited partnership, for which no tax benefit was provided.

Liquidity and Capital Resources

At June 29, 2003, the Company’s cash, cash equivalent, and investment balances increased $4,366,000 to $280,351,000 from $275,985,000 at December 31, 2002. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments to maintain liquidity. The Company’s cash requirements during the six-month period ended June 29, 2003 were met with positive cash flow from operations, as well as the proceeds from the issuance of stock under stock option, stock purchase, and other plans and the maturity and sale of investments. Cash requirements consisted of operating activities, capital expenditures, business acquisitions, and the purchase of investments. Capital expenditures during the first half of 2003 totaled $1,140,000 and consisted principally of expenditures for computer hardware and software.

On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock Associates III, L.P., a venture capital fund. The Company has committed to a total investment in the limited partnership of up to

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$25,000,000, of which $12,375,000 had been contributed as of June 29, 2003, including $2,000,000 during the first half of 2003. The commitment to contribute capital expires on January 1, 2005, and the Company does not have the right to withdraw from the partnership prior to December 31, 2010.

On December 12, 2000, the Company’s Board of Directors authorized the repurchase of up to $100,000,000 of the Company’s common stock. During 2002, a total of 1,768,452 shares were repurchased at a cost of $26,425,000. There were no shares repurchased under this program prior to 2002 or during the first half of 2003. The Company may repurchase additional shares under this program in future periods depending upon a variety of factors, including the market value of the Company’s common stock and the average return on the Company’s invested balances.

On March 31, 2003, the Company acquired the wafer identification business of Siemens Dematic AG for 7,000,000 Euros in cash (or $7,630,000), with the potential for an additional cash payment in 2005 of up to 1,700,000 Euros (or approximately $1,943,000 based upon the exchange rate at June 29, 2003) depending upon the achievement of certain performance criteria. The March 31, 2003 cash payment of 7,000,000 Euros was based upon an estimated balance sheet for the wafer identification business as of March 31, 2003. The Company is in the process of reviewing the actual March 31, 2003 balance sheet and the cash payment may be adjusted during the third quarter of 2003 based upon the outcome of this review.

On August 5, 2003, the Company’s Board of Directors declared a quarterly cash dividend of $0.06 per share. The dividend is payable on September 19, 2003 to all shareholders of record at the close of business on August 29, 2003. Future dividends will be declared at the discretion of the Board of Directors and will depend upon such factors as the Board of Directors deems relevant. The Board of Directors may modify the Company’s dividend policy from time to time.

The Company believes that its existing cash, cash equivalents, and investments balances will be sufficient to meet its planned operating, investing, and financing activities in 2003, which consist primarily of working capital and capital expenditure requirements, as well as any strategic initiatives in 2003, including its stock repurchase program, dividend payouts, and potential business or asset acquisitions.

New Pronouncements

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This issue addresses how revenue arrangements with multiple deliverables should be divided into separate units of accounting and how the arrangement consideration should be allocated to the identified separate accounting units. EITF Issue No. 00-21 is effective for fiscal periods beginning after June 15, 2003. The Company does not believe the adoption of EITF Issue No. 00-21 will have a material impact on its consolidated financial statements.

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities, and activities of another entity. Previously, a company generally has included other entities in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that guidance by requiring variable interest entities, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns. Interpretation No. 46 also requires disclosure about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not believe the adoption of Interpretation No. 46 will have a material impact on its consolidated financial statements.

On May 15, 2003, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS No. 150 represents a significant change in practice in the accounting for a number of financial instruments, including mandatorily redeemable equity instruments and certain equity derivatives that frequently are used in connection with share repurchase programs. The provisions of SFAS No. 150 are effective for public companies for all financial instruments created or modified after May 31, 2003, and to other instruments at the beginning of the first interim period beginning after June 15, 2003. The Company does

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not believe the adoption of SFAS No. 150 will have a material impact on its consolidated financial statements.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the Company’s exposures to market risk since December 31, 2002.

ITEM 4: CONTROLS AND PROCEDURES

As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective in ensuring that material information relating to the Company, including its consolidated subsidiaries, is made known to the certifying officers by others within the Company and its consolidated subsidiaries during the period covered by this report. From time to time, the Company reviews the disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 29, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS
 
    To the Company’s knowledge, there are no pending legal proceedings, other than as described in the section captioned “Intellectual Property,” appearing in Item I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002, which are material to the Company, to which it is a party, or to which any of its property is subject. There have been no material developments in such legal proceedings since December 31, 2002. In addition, from time to time, the Company may be subject to various claims and lawsuits by competitors, customers, or other parties arising in the ordinary course of business, including lawsuits charging patent infringement. There can be no assurance as to the outcome of any of this litigation.

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS
 
    None

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES
 
    None

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
    On April 24, 2003, a Special Meeting of the Stockholders of Cognex Corporation held in lieu of the 2003 Annual Meeting, the Stockholders elected Robert J. Shillman and Reuben Wasserman to serve as Directors for a term of three years. Patrick Alias, Jerald Fishman, Anthony Sun, and William Krivsky continued as Directors after the meeting. The 39,778,439 shares represented at the meeting voted as follows: The election of Robert J. Shillman as Director, 38,875,788 votes for and 902,651 withheld; the election of Reuben Wasserman as Director, 38,810,405 votes for and 968,034 withheld.

ITEM 5.   OTHER INFORMATION
 
    None

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

  (a)   Exhibits
 
    31.1 – Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
 
    31.2 – Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
 
    32.1 – Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
    32.2 – Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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  (b)   Reports on Form 8-K
 
      On June 10, 2003, the Company filed a Current Report, dated June 5, 2003, on Form 8-K regarding the dismissal of PricewaterhouseCoopers LLP and the engagement of Ernst & Young LLP as their principal independent accountants.
 
      On April 14, 2003, the Company furnished a Current Report, dated the same date, on Form 8-K regarding its earnings press release for the fiscal quarter ended March 30, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
DATE: August 12, 2003     COGNEX CORPORATION
         
        /s/ Robert J. Shillman
       
        Robert J. Shillman
President, Chief Executive Officer,
and Chairman of the Board of Directors
(duly authorized officer, principal executive officer)
         
        /s/ Richard A. Morin
       
        Richard A. Morin
Senior Vice President of Finance, Chief
Financial Officer, and Treasurer
(duly authorized officer, principal financial and accounting officer)

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