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COGNEX CORP - Quarter Report: 2011 July (Form 10-Q)

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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 July 3, 2011 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 001-34218
COGNEX CORPORATION
(Exact name of registrant as specified in its charter)
     
Massachusetts   04-2713778
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
One Vision Drive
Natick, Massachusetts 01760-2059
(508) 650-3000

(Address, including zip code, and telephone number, including
area code, of principal executive offices)
        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
     
Yes      X        No                     
        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
     
Yes      X        No                     
        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
             
Large accelerated filer
        X          Accelerated filer                  
Non-accelerated filer
                    Smaller reporting company                  
(Do not check if a smaller reporting company)
        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     
Yes                          No        X     
     As of July 3, 2011, there were 42,064,561 shares of Common Stock, $.002 par value, of the registrant outstanding.
 

 


 

INDEX
             
PART I     3
       
 
Item 1.     3
          3
          4
          5
          6
          7
       
 
Item 2.     18
       
 
Item 3.     24
       
 
Item 4.     24
       
 
PART II     25
       
 
Item 1.     25
       
 
Item 1A.     25
       
 
Item 2.     26
       
 
Item 3.     26
       
 
Item 4.     26
       
 
Item 5.     26
       
 
Item 6.     26
       
 
          28
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

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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  
    July 3,     July 4,     July 3,     July 4,  
    2011     2010     2011     2010  
    (unaudited)     (unaudited)  
Revenue
                               
Product
  $    77,566     $    67,067     $    146,443     $    121,680  
Service
    5,827       4,744       11,344       9,098  
 
                       
 
    83,393       71,811       157,787       130,778  
Cost of revenue
                               
Product
    16,454       15,914       31,553       28,825  
Service
    2,925       2,803       6,209       5,833  
 
                       
 
    19,379       18,717       37,762       34,658  
Gross margin
                               
Product
    61,112       51,153       114,890       92,855  
Service
    2,902       1,941       5,135       3,265  
 
                       
 
    64,014       53,094       120,025       96,120  
 
                               
Research, development, and engineering expenses
    10,506       8,076       19,988       16,179  
Selling, general, and administrative expenses
    29,466       25,738       58,627       49,360  
Restructuring charges
    -       39       -       88  
 
                       
 
                               
Operating income
    24,042       19,241       41,410       30,493  
 
                               
Foreign currency gain (loss)
    210       (8 )     151       (173 )
Investment income
    697       308       1,302       565  
Other expense
    (148 )     (156 )     (353 )     (402 )
 
                       
 
                               
Income before income tax expense
    24,801       19,385       42,510       30,483  
 
                               
Income tax expense
    5,704       4,458       9,777       7,011  
 
                       
 
                               
Net income
  $ 19,097     $ 14,927     $ 32,733     $ 23,472  
 
                       
 
                               
Earnings per weighted-average common and common-equivalent share:
                               
Basic
  $ 0.46     $ 0.38     $ 0.79     $ 0.59  
Diluted
  $ 0.45     $ 0.38     $ 0.77     $ 0.59  
 
                               
Weighted-average common and common-equivalent shares outstanding:
                               
Basic
    41,842       39,683       41,586       39,675  
 
                       
Diluted
    42,810       39,793       42,532       39,736  
 
                       
 
                               
Cash dividends per common share
  $ 0.09     $ 0.06     $ 0.17     $ 0.11  
 
                       
The accompanying notes are an integral part of these consolidated financial statements.

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COGNEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
                 
    July 3,     December 31,  
    2011     2010  
    (unaudited)          
ASSETS
               
 
Current assets:
               
Cash and cash equivalents
  $ 42,676     $ 33,203  
Short-term investments
    202,012       147,823  
Accounts receivable, less reserves of $1,248 and $1,235 in 2011 and 2010, respectively
    42,480       45,901  
Inventories
    27,004       22,717  
Deferred income taxes
    6,319       6,302  
Prepaid expenses and other current assets
    21,810       23,059  
 
           
 
               
Total current assets
    342,301       279,005  
 
               
Long-term investments
    108,700       102,055  
Property, plant, and equipment, net
    30,590       29,596  
Deferred income taxes
    15,707       15,555  
Intangible assets, net
    21,047       23,130  
Goodwill
    82,654       82,204  
Other assets
    1,658       1,559  
 
           
 
               
 
  $    602,657     $ 533,104  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current liabilities:
               
Accounts payable
  $ 6,922     $ 7,153  
Accrued expenses
    27,941       29,346  
Accrued income taxes
    8,726       7,771  
Deferred revenue and customer deposits
    13,089       10,162  
 
           
 
               
Total current liabilities
    56,678       54,432  
 
               
Reserve for income taxes
    5,694       5,361  
 
               
Commitments and contingencies (Note 8)
               
 
               
Shareholders’ equity:
               
Common stock, $.002 par value – Authorized: 140,000 shares, issued: 42,065 and 41,065 shares in 2011 and 2010, respectively
    84       82  
Additional paid-in capital
    130,171       102,620  
Retained earnings
    405,463       379,826  
Accumulated other comprehensive gain (loss), net of tax
    4,567       (9,217 )
 
           
 
               
Total shareholders’ equity
    540,285       473,311  
 
           
 
               
 
  $ 602,657     $ 533,104  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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COGNEX CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands)
                                                         
                                    Accumulated              
                    Additional           Other           Total
    Common Stock   Paid-in   Retained   Comprehensive   Comprehensive   Shareholders’
    Shares   Par Value   Capital   Earnings   Gain (Loss)   Income   Equity
 
Balance as of December 31, 2010
    41,065       $        82       $   102,620       $   379,826       $    (9,217 )             $   473,311  
 
                                                       
Issuance of common stock under stock option plans
    1,000       2       20,817       -       -               20,819  
 
                                                       
Stock-based compensation expense
    -       -       4,309       -       -               4,309  
 
                                                       
Excess tax benefit from stock option exercises
    -       -       2,425       -       -               2,425  
 
                                                       
Payment of dividends
    -       -       -       (7,096)       -               (7,096)  
 
                                                       
Comprehensive income:
                                                       
 
                                                       
Net income
    -       -       -       32,733       -       $     32,733       32,733  
 
                                                       
Net unrealized loss on available-for-sale investments, net of tax of $35
    -       -       -       -       (177)       (177)       (177)  
 
                                                       
Foreign currency translation adjustment, net of tax of $469
    -       -       -       -       13,961       13,961       13,961  
 
                                                       
 
                                                       
Comprehensive income
                                            $     46,517          
 
                                                       
 
                                                       
Balance as of July 3, 2011 (unaudited)
        42,065       $         84       $   130,171       $   405,463       $      4,567               $    540,285  
 
                                                       
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  
    July 3,     July 4,  
    2011     2010  
    (unaudited)  
Cash flows from operating activities:
               
Net income
  $   32,733     $   23,472  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Stock-based compensation expense
    4,309       394  
Depreciation of property, plant, and equipment
    2,669       2,282  
Amortization of intangible assets
    2,130       2,462  
Amortization of premiums/discounts on investments
    2,996       1,091  
Tax effect of stock option exercises
    (2,425)       76  
Change in deferred income taxes
    (642)       (789)  
Change in operating assets and liabilities
    6,309       (7,711)  
 
           
 
               
Net cash provided by operating activities
    48,079       21,277  
 
               
Cash flows from investing activities:
               
Purchases of investments
    (168,165)       (116,600)  
Maturities and sale of investments
    114,803       35,486  
Purchases of property, plant, and equipment
    (3,625)       (2,231)  
Cash received related to disposition
    -       315  
 
           
 
               
Net cash used in investing activities
    (56,987)       (83,030)  
 
               
Cash flows from financing activities:
               
Issuance of common stock under stock option plans
    20,819       395  
Stock option buyback
    -       (83)  
Payment of dividends
    (7,096)       (4,365)  
Tax effect of stock option exercises
    2,425       (76)  
 
           
 
               
Net cash provided by (used in) financing activities
    16,148       (4,129)  
 
               
Effect of foreign exchange rate changes on cash
    2,233       (16,007)  
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    9,473       (81,889)  
Cash and cash equivalents at beginning of period
    33,203       119,831  
 
           
Cash and cash equivalents at end of period
  $ 42,676     $ 37,942  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 (GAAP). 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, 2010.
In the opinion of the management of Cognex Corporation (the “Company”), the accompanying consolidated unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments necessary to present fairly the Company’s financial position as of July 3, 2011, and the results of its operations for the three-month and six-month periods ended July 3, 2011 and July 4, 2010, and changes in shareholders’ equity and cash flows for the periods presented.
The results disclosed in the Consolidated Statements of Operations for the three-month and six-month periods ended July 3, 2011 are not necessarily indicative of the results to be expected for the full year.
NOTE 2:   New Pronouncements
In the second quarter of 2011, the Financial Accounting Standards Board (FASB) issued the following accounting standards updates aimed at converging U.S. GAAP with international standards.
Accounting Standards Update (ASU) 2011-04, “Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”
The amendments in this ASU change certain aspects of the fair value measurement guidance in Accounting Standards Codification (ASC) 820, “Fair Value Measurement”, including the application of the concepts of highest and best use and valuation premise, introduction of an option to measure groups of offsetting assets and liabilities on a net basis, incorporation of certain premiums and discounts in fair value measurements, and measurement of the fair value of certain instruments classified in shareholders’ equity. In addition, the amended guidance includes new fair value disclosure requirements, including, among other things, information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and a narrative description of Level 3 measurements’ sensitivity to changes in unobservable inputs. ASU 2011-04 must be applied prospectively and is effective for the first quarter of 2012. Management is in the process of evaluating the impact of this ASU.
Accounting Standards Update (ASU) 2011-05, “Comprehensive Income”
The amendments in this ASU revise the manner in which companies present comprehensive income in their financial statements. This ASU requires companies to report the components of comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement would present the components of net income, similar to the Company’s current Consolidated Statements of Operations, while the second statement would include the components of other comprehensive income (OCI), as well as a cumulative total for comprehensive income. This ASU does not change the items that must be reported in OCI. ASU 2011-05 must be applied retrospectively and is effective for the first quarter of 2012. Management is in the process of evaluating the presentation options required by this ASU.
NOTE 3:   Fair Value Measurements
Financial Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of July 3, 2011 (in thousands):

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                   
    Quoted Prices in    
    Active Markets   Significant Other
    for Identical   Observable
    Assets (Level 1)   Inputs (Level 2)
Assets:
               
Money market instruments
  $    2,452     $    -  
Treasury bills
    -       25,215  
Municipal bonds
    -       118,703  
Corporate bonds
    -       105,744  
Agency bonds
    -       38,416  
Sovereign bonds
    -       21,531  
Covered bonds
    -       6,715  
Currency forward contracts
    209       -  
 
               
Liabilities:
               
Currency forward contracts
    13       -  
The majority of the Company’s investments are reported at fair value based upon model-driven valuations in which all significant inputs are observable or can be derived from or corroborated by observable market data for substantially the full term of the asset, and are therefore classified as Level 2 investments. These investments are priced daily by a large, third-party pricing service. The service maintains regular contact with market makers, brokers, dealers, and analysts to gather information on market movement, direction, trends, and other specific data. They use this information to structure yield curves for various types of debt securities and arrive at the current day’s valuations. The Company’s money market instruments are reported at fair value based upon the daily market price for identical assets in active markets, and are therefore classified as Level 1. The Company did not record an other-than-temporary impairment of investments in the six-month period ended July 3, 2011. Further discussion of management’s analysis related to an other-than-temporary impairment is included in Note 4.
The Company’s forward contracts are reported at fair value based upon quoted U.S. Dollar foreign currency exchange rates, and are therefore classified as Level 1.
Financial Assets that are Measured at Fair Value on a Non-recurring Basis
The Company has an interest in a limited partnership, which is accounted for using the cost method and is measured at fair value on a non-recurring basis. The fair value of the Company’s limited partnership interest is based upon valuations of the partnership’s investments as determined by the General Partner. Publicly-traded investments in active markets are reported at the market closing price less a discount, as appropriate, to reflect restricted marketability. Fair value for private investments for which observable market prices in active markets do not exist is based upon the best information available including the value of a recent financing, reference to observable valuation measures for comparable companies (such as revenue multiples), public or private transactions (such as the sale of a comparable company), and valuations for publicly-traded comparable companies. The amount determined to be fair value also incorporates the General Partner’s own judgment and close familiarity with the business activities of each portfolio company. Management monitors the carrying value of this investment compared to its fair value to determine if an other-than-temporary impairment has occurred. If a decline in fair value is considered to be other-than-temporary, an impairment charge would be recorded to reduce the carrying value of the asset to its fair value. The portfolio consists of securities of public and private companies, and consequently, inputs used in the fair value calculation are classified as Level 3. The Company did not record an other-than-temporary impairment of this asset in the six-month period ended July 3, 2011 as there was no indication of impairment during this period.
Non-financial Assets that are Measured at Fair Value on a Non-recurring Basis
Non-financial assets such as goodwill, intangible assets, and property, plant, and equipment are measured at fair value only when an impairment loss is recognized. The Company did not record an impairment charge related to these assets in the six-month period ended July 3, 2011.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4:   Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and investments consisted of the following (in thousands):
                 
    July 3,   December 31,
    2011   2010
 
               
Cash
  $    28,679     $    26,650  
Money market instruments
    2,452       6,553  
Treasury bills
    11,545       -  
 
           
Cash and cash equivalents
    42,676       33,203  
 
           
 
               
Treasury bills
    12,979       2,494  
Municipal bonds
    86,029       75,457  
Corporate bonds
    68,425       34,543  
Agency bonds
    23,428       15,979  
Sovereign bonds
    11,151       19,350  
 
           
Short-term investments
    202,012       147,823  
 
           
 
               
Treasury bills
    691       -  
Municipal bonds
    32,674       34,794  
Corporate bonds
    37,319       36,762  
Agency bonds
    14,988       21,025  
Sovereign bonds
    10,380       -  
Covered bonds
    6,715       3,541  
Limited partnership interest (accounted for using cost method)
    5,933       5,933  
 
           
Long-term investments
    108,700       102,055  
 
           
 
  $ 353,388     $ 283,081  
 
           
The Company’s portfolio consists of treasury bills, municipal bonds, corporate bonds, agency bonds, sovereign bonds, and covered bonds. In the second quarter of 2011, the Company invested in French Treasury bills that have been classified as a cash equivalent. Treasury bills classified as investments consist of debt securities issued by the U.S. government; municipal bonds consist of debt securities issued by state and local government entities; corporate bonds consist of debt securities issued by both international and domestic companies; agency bonds consist of domestic or foreign obligations of government agencies and government sponsored enterprises that have government backing; sovereign bonds consist of direct debt issued by international governments (France, Germany, and the Netherlands as of July 3, 2011); and covered bonds consist of debt securities backed by governments, mortgages, or public sector loans.
The following tables summarize the Company’s available-for-sale investments as of July 3, 2011 (in thousands):

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized        
    Cost     Gains     Losses     Fair Value  
Short-term:
                               
Treasury bills
  $ 12,979     $ -     $ -     $ 12,979  
Municipal bonds
    85,959       75       (5)       86,029  
Corporate bonds
    68,528       15       (118)       68,425  
Agency bonds
    23,442       24       (38)       23,428  
Sovereign bonds
    11,186       -       (35)       11,151  
 
                               
Long-term:
                               
Treasury bills
    690       1       -       691  
Municipal bonds
    32,549       127       (2)       32,674  
Corporate bonds
    37,732       -       (413)       37,319  
Agency bonds
    15,103       1       (116)       14,988  
Sovereign bonds
    10,387       2       (9)       10,380  
Covered bonds
    6,755       -       (40)       6,715  
 
                       
 
 
  $ 305,310     $ 245     $ (776)     $ 304,779  
 
                       
The following tables summarize the Company’s gross unrealized losses and fair value for available-for-sale investments in an unrealized loss position as of July 3, 2011, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position (in thousands):
                                                                
    Unrealized Loss Position For:              
    Less than 12 Months     12 Months or Greater     Total  
            Unrealized             Unrealized           Unrealized  
    Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
Municipal bonds
  $ 39,174     $ (7)     $ -     $ -     $ 39,174     $ (7)  
Corporate bonds
    84,990       (515)       10,438       (16)       95,428       (531)  
Agency bonds
    24,993       (149)       1,259       (5)       26,252       (154)  
Sovereign bonds
    13,144       (23)       2,483       (21)       15,627       (44)  
Covered bonds
    6,715       (40)       -       -       6,715       (40)  
 
                                   
 
  $ 169,016     $ (734)     $ 14,180     $ (42)     $ 183,196     $ (776)  
 
                                   
As of July 3, 2011, the Company did not identify an other-than-temporary impairment on these investments. In its evaluation, management considered the types of securities, the credit rating of the securities, the length of time the securities have been in a loss position, the size of the loss position, our intent and ability to hold the securities to expected recovery of value, and other meaningful information. The Company does not intend to sell, and is unlikely to be required to sell, any of these securities before its effective maturity or market price recovery. The Company recorded gross realized gains and gross realized losses on the sale of debt securities totaling $22,000 and $3,000, respectively, in the three-month period ended July 3, 2011, and $31,000 and $17,000, respectively, in the six-month period ending July 3, 2011.
The following table presents the effective maturity dates of the Company’s available-for-sale investments as of July 3, 2011 (in thousands):
                                         
      <1 Year       1-2 Years       2-3 Years       3-4 Years       Total  
Treasury bills
  $ 12,979     $ 691     $ -     $ -     $ 13,670  
Municipal bonds
    86,029       23,889       7,769       1,016       118,703  
Corporate bonds
    68,425       20,879       16,440       -       105,744  
Agency bonds
    23,428       11,984       3,004       -       38,416  
Sovereign bonds
    11,151       4,476       5,904       -       21,531  
Covered bonds
    -       6,715       -       -       6,715  
 
                             
 
  $   202,012     $   68,634     $   33,117     $   1,016     $   304,779  
 
                             
In June 2000, the Company became a Limited Partner in Venrock Associates III, L.P. (Venrock), a venture capital fund. A Director of the Company was a General Partner of Venrock Associates through December 31, 2009. The Company has committed to a total investment in the limited partnership of up to $20,500,000, with an expiration date of December 31, 2013. As of July 3, 2011, the Company contributed $19,886,000 to the partnership. The remaining commitment of $614,000 can be called by Venrock at any time before December 31, 2013. Distributions are received and contributions are requested at the discretion

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
of Venrock’s management. No contributions were made and no distributions were received during the six-month period in 2011.
NOTE 5:   Inventories
Inventories consisted of the following (in thousands):
                 
  July 3,   December 31,  
  2011   2010  
 
               
Raw materials
  $     17,877     $     14,791  
Work-in-process
    2,765       2,051  
Finished goods
    6,362       5,875  
 
           
 
               
 
  $ 27,004     $ 22,717  
 
           
NOTE 6:   Intangible Assets and Goodwill
The change in the carrying value of goodwill during the six-month period ended July 3, 2011 ($450,000) is wholly attributable to fluctuations in foreign currency exchange rates, as a portion of this asset is recorded on the books of the Company’s Irish subsidiary.
The Company evaluates the possible impairment of goodwill and other intangible assets whenever events or circumstances indicate that the carrying value of these assets may not be recoverable. No triggering event occurred in the six-month period ended July 3, 2011 that would indicate a potential impairment of goodwill or other intangible assets. However, the Company continues to monitor market conditions, and changes in market conditions could result in an impairment of goodwill or other intangible assets in a future period.
NOTE 7:   Warranty Obligations
The Company warrants its hardware products to be free from defects in material and workmanship for periods primarily ranging from six months to two years from the time of sale based upon the product being purchased and the terms of the customer arrangement. Warranty obligations are evaluated and recorded at the time of sale since it is probable that customers will make claims under warranties related to products that have been sold and the amount of these claims can be reasonably estimated based upon historical costs to fulfill claims. Obligations may also be recorded subsequent to the time of sale whenever specific events or circumstances impacting product quality become known that would not have been taken into account using historical data. Warranty obligations are included in “Accrued expenses” on the Consolidated Balance Sheets.
The changes in the warranty obligations were as follows (in thousands):
         
Balance as of December 31, 2010
  $      1,985  
Provisions for warranties issued during the period
    774  
Fulfillment of warranty obligations
    (724)  
Foreign exchange rate changes
    137  
 
     
 
       
Balance as of July 3, 2011
  $ 2,172  
 
     
NOTE 8:   Contingencies
In May 2008, the Company filed a complaint against MvTec Software GmbH, MvTec LLC, and Fuji America Corporation in the United States District Court for the District of Massachusetts alleging infringement of certain patents owned by the Company. In April 2009 and again in June 2009, Defendant MvTec Software GmbH filed re-examination requests of the patents-at-issue with the United States Patent and Trademark Office. This matter is ongoing.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In May 2009, the Company pre-filed a complaint with the United States International Trade Commission (ITC) pursuant to Section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. §1337, against MvTec Software GmbH, MvTec LLC, Fuji America, and several other respondents alleging unfair methods of competition and unfair acts in the unlawful importation into the United States, sale for importation, or sale within the United States after importation. By this filing, the Company requested the ITC to investigate the Company’s contention that certain machine vision software, machine vision systems, and products containing the same infringe, and respondents directly infringe and/or actively induce and/or contribute to the infringement in the United States, of one or more of the Company’s U.S. patents. In July 2009, the ITC issued an order that it would institute an investigation based upon the Company’s assertions. In September 2009, the Company reached a settlement with two of the respondents, and in December 2009, the Company reached a settlement with five additional respondents. In March 2010, the Company reached a settlement with respondent Fuji Machine Manufacturing Co., Ltd. and its subsidiary Fuji America Corporation. These settlements did not have a material impact on the Company’s financial results. An ITC hearing was held in May 2010. In July 2010, the Administrative Law Judge issued an initial determination finding two of the Company’s patents invalid and that respondents did not infringe the patents-at-issue. In September 2010, the Commission issued a notice that it would review the initial determination of the Administrative Law Judge. The ITC issued its Final Determination in November 2010 in which it determined to modify-in-part and affirm-in-part the Administrative Law Judge’s determination, and terminate the investigation with a finding of no violation of Section 337 of the Tariff Act of 1930 (as amended 19 U.S.C. §1337). The Company has filed an appeal of the decision with the United States Court of Appeals for the Federal Circuit. This matter is ongoing.
The Company cannot predict the outcome of the above-referenced pending matters and an adverse resolution of these lawsuits could have a material adverse effect on the Company’s financial position, liquidity, results of operations, and/or indemnification obligations. In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened on behalf of or against the Company. While we cannot predict the outcome of these incidental matters, we believe that any liability arising from them will not have a material adverse effect on our financial position, liquidity, or results of operations.
NOTE 9:   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.
In the ordinary course of business, the Company may accept standard limited indemnification provisions in connection with the sale of its products, 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 generally 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.
In the ordinary course of business, 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 generally limited and is likely recoverable under the Company’s insurance policies. As a result of this coverage, and the fact that the Company has never incurred significant costs to defend lawsuits or settle claims related to these

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
indemnification provisions, the Company believes the estimated fair value of these provisions is minimal.
NOTE 10:   Derivative Instruments
The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk and interest rate risk. The Company does not currently manage its interest rate risk with derivative instruments; however, foreign currency exchange rate risk is currently mitigated with derivative instruments. The Company uses derivative instruments to provide an economic hedge against its transactional currency/functional currency exchange rate exposures. Forward contracts on currencies are entered into to manage the transactional currency/functional currency exposure of the Company’s Irish subsidiary’s accounts receivable denominated in U.S. dollars and intercompany receivables denominated in Japanese Yen. These forward contracts are used to minimize foreign currency gains or losses, as the gains or losses on these contracts are intended to offset the losses or gains on the underlying exposures.
These forward contracts do not qualify for hedge accounting. Both the underlying exposures and the forward contracts are recorded at fair value on the Consolidated Balance Sheets and changes in fair value are reported as “Foreign currency gain (loss)” on the Consolidated Statements of Operations. The Company recorded net foreign currency gains of $210,000 and $151,000 in the three-month and six-month periods in 2011, respectively, and net foreign losses of $8,000 and $173,000 in the three-month and six-month periods in 2010, respectively.
As of July 3, 2011, the Company had the following outstanding forward contracts that were entered into to mitigate foreign currency exchange rate risk:
     
Currency   Amount
     
Japanese Yen/Euro
  200,000,000 Japanese Yen
U.S. Dollar/Euro
  14,310,000 U.S. Dollars
Information regarding the fair value of the forward contracts outstanding as of July 3, 2011 and December 31, 2010 was as follows (in thousands):
                                         
    Asset Derivatives   Liability Derivatives
        Fair Value       Fair Value
    Balance                   Balance        
    Sheet   July 3,   December 31,   Sheet   July 3,   December 31,
    Location   2011   2010   Location   2011   2010
         
Currency
forward
contracts
 
Prepaid
expenses
and other
current
assets
    $ 209       $ 83    
Accrued
expenses
    $ 13       $ 125  
Information regarding the effect of the forward contracts, net of the underlying exposure, on the Consolidated Statements of Operations for the three-month and six-month periods ended July 3, 2011 and July 4, 2010 were as follows (in thousands):
                                         
    Location of   Amount of Gain (Loss)   Location of   Amount of Gain (Loss)
    Gain (Loss)   Recognized in Income on   Gain (Loss)   Recognized in Income on
    Recognized   Derivatives   Recognized   Derivatives
    in Income   Three-months ended   in Income   Six-months ended
    on   July 3,   July 4,   on   July 3,   July 4,
    Derivatives   2011   2010   Derivatives   2011   2010
Currency
forward contracts
 
Foreign
currency
gain (loss)
     $ 126       $ (206 )  
Foreign
currency
gain (loss)
     $ 128        $ (274 )

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 11:   Stock-Based Compensation Expense
The Company’s share-based payments that result in compensation expense consist solely of stock option grants. As of July 3, 2011, the Company had 7,063,000 shares available for grant under two stock option plans: the 2001 General Stock Option Plan (5,570,640) and the 2007 Stock Option and Incentive Plan (1,492,360). Each of these plans expires ten years from the date the plan was approved. The 2001 General Stock Option Plan will expire in December of 2011. Generally, stock options are granted with an exercise price equal to the market value of the Company’s common stock at the grant date, vest over four years based upon continuous service, and expire ten years from the grant date.
The following table summarizes the Company’s stock option activity for the six-month period ended July 3, 2011:
                                 
                    Weighted-        
            Weighted-     Average     Aggregate  
            Average     Remaining     Intrinsic  
    Shares     Exercise     Contractual     Value  
    (in thousands)     Price     Term (in years)     (in thousands)  
Outstanding as of December 31, 2010
    4,318     $ 20.05                  
Granted
    927       30.40                  
Exercised
    (1,004)     20.87                  
Forfeited or expired
    (52)     22.00                  
 
                               
Outstanding as of July 3, 2011
    4,189       $     22.15       7.2       $       58,091  
 
                               
Exercisable as of July 3, 2011
    1,638       $     20.36       5.1     $       25,707  
 
                               
The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:
                                 
    Three-months Ended     Six-months Ended  
    July 3,     July 4,     July 3,     July 4,  
    2011     2010     2011     2010  
Risk-free rate
    3.6%       3.2%       3.6%       3.4%  
Expected dividend yield
    1.0%       1.4%       1.0%       1.3%  
Expected volatility
    42%       44%       42%       44%  
Expected term (in years)
    5.2       5.2       5.4       5.3  
Risk-free rate
The risk-free rate was based upon a U.S. treasury instrument whose term was consistent with the contractual term of the option.
Expected dividend yield
The current dividend yield was calculated by annualizing the cash dividend declared by the Company’s Board of Directors for the current quarter and dividing that result by the closing stock price on the grant date. The current dividend yield was then adjusted to reflect the Company’s expectations relative to future dividend declarations.
Expected volatility
The expected volatility was based upon a combination of historical volatility of the Company’s common stock over the contractual term of the option and implied volatility for traded options of the Company’s stock.
Expected term
The expected term was derived from the binomial lattice model from the impact of events that trigger exercises over time.
The weighted-average grant-date fair values of stock options granted during the three-month periods ended July 3, 2011 and July 4, 2010 were $11.95 and $6.89, respectively. The weighted-average grant-date fair values of stock options granted during the six-month periods ended July 3, 2011 and July 4, 2010 were $11.77 and $7.10, respectively.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Company stratifies its employee population into two groups: one consisting of senior management and another consisting of all other employees. The Company currently expects that approximately 66% of its stock options granted to senior management and 68% of its options granted to all other employees will actually vest. Therefore, the Company currently applies an estimated forfeiture rate of 13% to all unvested options for senior management and a rate of 14% for all other employees. The Company revised its estimated forfeiture rates in the first quarter of 2011, and the cumulative effect of this change resulted in a reduction in compensation expense of approximately $80,000.
The total stock-based compensation expense and the related income tax benefit recognized for the three-month period ended July 3, 2011 were $1,957,000 and $654,000, respectively, and for the three-month period ended July 4, 2010 were $427,000 and $143,000, respectively. The total stock-based compensation expense and the related income tax benefit recognized for the six-month period ended July 3, 2011 were $4,309,000 and $1,445,000, respectively, and for the six-month period ended July 4, 2010 were $394,000 and $124,000, respectively. No compensation expense was capitalized as of July 3, 2011 or December 31, 2010.
The following table details the stock-based compensation expense by caption for each period presented on the Consolidated Statements of Operations (in thousands):
                                 
    Three-months Ended     Six-months Ended  
    July 3,     July 4,     July 3,     July 4,  
    2011     2010     2011     2010  
                                 
Product cost of revenue
    $        105       $            14       $       270       $         72  
Service cost of revenue
    39       11       109       12  
Research, development, and engineering
    529       83       1,338       334  
Selling, general, and administrative
    1,284       319       2,592       (24)  
 
                             
 
  $ 1,957       $          427       $       4,309       $       394  
 
                             
The total intrinsic values of stock options exercised for the three-month periods ended July 3, 2011 and July 4, 2010 were $7,969,000 and $38,000, respectively. The total intrinsic values of stock options exercised for the six-month periods ended July 3, 2011 and July 4, 2010 were $12,637,000 and $51,000, respectively.
As of July 3, 2011, total unrecognized compensation expense related to non-vested stock options was $9,939,000, which is expected to be recognized over a weighted-average period of 1.9 years.
NOTE 12: Stock Repurchase Program
In April 2008, the Company’s Board of Directors authorized the repurchase of up to $50,000,000 of the Company’s common stock. As of July 3, 2011, the Company had repurchased a total of 1,038,797 shares at a cost of $20,000,000 under this program. The Company did not purchase any shares under this program during the six-month period ended July 3, 2011. The Company may repurchase shares under this program in future periods depending upon a variety of factors, including, among other things, stock price levels, share availability, and cash reserve requirements.
NOTE 13: Taxes
A reconciliation of the United States federal statutory corporate tax rate to the Company’s effective tax rate, or income tax provision, was as follows:
                                 
    Three-months Ended     Six-months Ended  
    July 3,   July 4,   July 3,   July 4,
    2011   2010   2011   2010
 
Income tax at federal statutory rate
    35%       35%       35%       35%  
State income taxes, net of federal benefit
    1       1       1       1  
Foreign tax rate differential
    (13)       (13)       (13)       (13)  
 
                               
 
Income tax provision
    23%       23%       23%       23%  
 
                               

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During the six-month period ended July 3, 2011, the Company recorded a $298,000 increase in liabilities, net of deferred tax benefit, for uncertain tax positions that were recorded as income tax expense, of which $149,000 was recorded in the three-month period ended July 3, 2011. Estimated interest and penalties included in these amounts totaled $41,000 for the six-month period ended July 3, 2011, of which $20,000 was recorded in the three-month period ended July 3, 2011.
The Company’s reserve for income taxes, including gross interest and penalties of $1,238,000, was $5,694,000 as of July 3, 2011. All of the Company’s liabilities for uncertain tax positions are classified as non-current as of July 3, 2011. If the Company’s tax positions were sustained or the statutes of limitations related to certain positions expired, these reserves would be released and income tax expense would be reduced in a future period, less $160,000 that would be recorded through Additional Paid in Capital. As a result of the expiration of certain statutes of limitations, there is a potential that a portion of these reserves could be released, which would decrease income tax expense by approximately $500,000 to $1,000,000 over the next twelve months.
The Company has defined its major tax jurisdictions as the United States, Ireland, and Japan, and within the United States, Massachusetts and California. The tax years 2007 through 2010 remain open to examination by various taxing authorities in the jurisdictions in which the Company operates.
The Company is currently negotiating an Advanced Pricing Agreement (APA) with Japan that will cover tax years 2006 through 2012. The Company believes it is adequately reserved for these open years. No formal agreement has been reached between the Tax Authorities in Ireland and Japan as of the date of this filing.
NOTE 14:  Weighted-Average Shares
Weighted-average shares were calculated as follows (in thousands):
                                 
    Three-months Ended     Six-months Ended  
    July 3,     July 4,     July 3,     July 4,  
      2011     2010       2011       2010  
 
Basic weighted-average common shares outstanding
    41,842     39,683     41,586     39,675
Effect of dilutive stock options
    968     110     946     61
 
                     
Weighted-average common and common-equivalent shares outstanding
    42,810     39,793     42,532     39,736
 
               
Stock options to purchase 968,676 and 728,572 shares of common stock, on a weighted-average basis, were outstanding during the three-month and six-month periods ended July 3, 2011, respectively, and 3,384,286 and 3,859,914 for the same periods in 2010, but were not included in the calculation of dilutive net income per share because they were anti-dilutive.
NOTE 15:   Segment Information
The Company has two reportable segments: the Modular Vision Systems Division (MVSD) and the Surface Inspection Systems Division (SISD). MVSD develops, manufactures, and markets modular vision systems that are used to control the manufacture of discrete items by locating, identifying, inspecting, and measuring them during the manufacturing process. SISD develops, manufactures, and markets surface inspection vision systems that are used to inspect surfaces of materials processed in a continuous fashion, such as metals, papers, non-wovens, plastics, and glass, to ensure there are no flaws or defects on the surfaces. Segments are determined based upon the way that senior management organizes its business for making operating decisions and assessing performance. The Company evaluates segment performance based upon income or loss from operations, excluding stock-based compensation expense.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes information about the segments (in thousands):
                                 
Three-months Ended                   Reconciling        
July 3, 2011   MVSD     SISD     Items     Consolidated  
 
Product revenue
  $ 70,942     $ 6,624     $ -     $ 77,566  
Service revenue
    1,834       3,993       -       5,827  
Operating income
    26,587       2,022       (4,567)       24,042  
                                 
Six-months Ended                   Reconciling        
July 3, 2011   MVSD     SISD     Items     Consolidated  
 
Product revenue
  $ 133,759     $ 12,684     $ -     $ 146,443  
Service revenue
    3,803       7,541       -       11,344  
Operating income
    48,614       3,019       (10,223)       41,410  
                                 
Three-months Ended                   Reconciling        
July 4, 2010   MVSD     SISD     Items     Consolidated  
 
Product revenue
  $ 59,345     $ 7,722     $ -     $ 67,067  
Service revenue
    1,653       3,091       -       4,744  
Operating income
    22,939       1,330       (5,028)       19,241  
                                 
Six-months Ended                   Reconciling        
July 4, 2010   MVSD     SISD     Items     Consolidated  
 
Product revenue
  $ 109,005     $ 12,675     $ -     $ 121,680  
Service revenue
    3,150       5,948       -       9,098  
Operating income
    38,384       1,002       (8,893)       30,493  
Reconciling items consist of stock-based compensation expense and unallocated corporate expenses, which primarily include corporate headquarters costs, professional fees, and patent infringement litigation. Additional asset information by segment is not produced internally for use by the chief operating decision maker, and therefore, is not presented. Additional asset information is not provided because cash and investments are commingled and the divisions share assets and resources in a number of locations around the world.
NOTE 16:  Dividends
On May 2, 2011, the Company’s Board of Directors declared a cash dividend of $0.09 per share. The dividend was paid on June 17, 2011 to all shareholders of record at the close of business on June 3, 2011.
On July 28, 2011, the Company’s Board of Directors declared a cash dividend of $0.09 per share. The dividend is payable on September 16, 2011 to all shareholders of record at the close of business on September 2, 2011.

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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 our use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” “could,” “should,” and similar words and other statements of a similar sense. These statements are based upon our current estimates and expectations as to prospective events and circumstances, which may or may not be in our control and as to which there can be no firm assurances given. These forward-looking statements, which include statements regarding business and market trends, future financial performance, customer order rates, and growth and strategic plans, involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) current and future conditions in the global economy; (2) the cyclicality of the semiconductor and electronics industries; (3) the inability to penetrate new markets; (4) the inability to achieve significant international revenue; (5) fluctuations in foreign currency exchange rates; (6) the loss of a large customer; (7) the inability to attract and retain skilled employees; (8) the reliance upon key suppliers to manufacture and deliver critical components for our products; (9) the failure to effectively manage product transitions or accurately forecast customer demand; (10) the inability to design and manufacture high-quality products; (11) the technological obsolescence of current products and the inability to develop new products; (12) the failure to properly manage the distribution of products and services; (13) the inability to protect our proprietary technology and intellectual property; (14) our involvement in time-consuming and costly litigation; (15) the impact of competitive pressures; (16) the challenges in integrating and achieving expected results from acquired businesses; (17) potential impairment charges with respect to our investments or for acquired intangible assets or goodwill; and (18) exposure to additional tax liabilities. The foregoing list should not be construed as exhaustive and we encourage readers to refer to the detailed discussion of risk factors included in Part I - Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as well as Part II- Item 1A of this report. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to subsequently revise forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such statements are made.
Executive Overview
Cognex Corporation is a leading worldwide provider of machine vision products that capture and analyze visual information in order to automate tasks, primarily in manufacturing processes, where vision is required. Our Modular Vision Systems Division (MVSD) specializes in machine vision systems that are used to automate the manufacturing of discrete items, while our Surface Inspection Systems Division (SISD) specializes in machine vision systems that are used to inspect the surfaces of materials processed in a continuous fashion.
In addition to product revenue derived from the sale of machine vision systems, the Company also generates revenue by providing maintenance and support, training, consulting, and installation services to its customers. Our customers can be classified into three primary markets: factory automation, semiconductor and electronics capital equipment, and surface inspection.
   
Factory automation customers purchase Cognex vision products and incorporate them into their manufacturing processes. Virtually every manufacturer can achieve better quality and manufacturing efficiency by using machine vision, and therefore, this segment includes a broad base of customers across a variety of industries, including automotive, consumer electronics, food and beverage, health and beauty, medical devices, packaging, pharmaceutical, and solar. The factory automation market also includes customers who purchase Cognex vision products for use outside of the assembly process, such as using ID products in logistics automation for package sorting and distribution. Sales to factory automation customers represented approximately 74% of total revenue in the second quarter of 2011.

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Semiconductor and electronics capital equipment manufacturers purchase Cognex vision products and integrate them into the automation equipment that they manufacture and then sell to their customers to either make semiconductor chips or assemble printed circuit boards. Demand from these capital equipment manufacturers has historically been highly cyclical, with periods of investment followed by downturn. Sales to semiconductor and electronics capital equipment manufacturers represented approximately 13% of total revenue in the second quarter of 2011.
 
   
Surface inspection customers are manufacturers of materials processed in a continuous fashion, such as metals, paper, non-wovens, plastics, and glass. These customers need sophisticated machine vision to detect and classify defects on the surfaces of those materials as they are being processed at high speeds. Surface inspection sales represented approximately 13% of total revenue in the second quarter of 2011.
Revenue for the second quarter of 2011 totaled $83,393,000, representing a 16% increase from the second quarter of 2010. The higher revenue contributed to a gross margin of 77% of revenue in the second quarter of 2011, compared to 74% of revenue in the same period of 2010. Operating expenses increased by $6,119,000 over the prior year’s second quarter due primarily to expenses associated with increased headcount in strategic areas, higher stock-based compensation expense, and the impact of foreign currency exchange rate changes. As a result, the Company generated an operating profit of $24,042,000, or 29% of revenue, in the second quarter of 2011, compared to an operating profit of $19,241,000, or 27% of revenue, in the second quarter of 2010.
Results of Operations
Revenue
Revenue increased by $11,582,000, or 16%, over the equivalent three-month period in 2010 and increased by $27,009,000, or 21%, over the equivalent six-month period in 2010. Increases in both periods were primarily due to higher sales to customers in the factory automation market.
Factory Automation
Sales to manufacturing customers in the factory automation area, which are included in the Company’s MVSD segment, represented 74% and 72% of total revenue for the three-month and six-month periods in 2011, respectively, compared to 69% and 70% for the same periods in 2010. Sales to these customers increased by $12,002,000, or 24%, for the three-month period and increased by $22,387,000, or 25%, for the six-month period. A weaker U.S. Dollar in 2011 compared to the prior year contributed to the higher revenue, as sales denominated in foreign currencies were translated to U.S. Dollars. Excluding the impact of foreign exchange rate changes on revenue, sales to factory automation customers increased by $9,261,000, or 19%, for the three-month period and increased by $19,652,000, or 22%, for the six-month period. The increases were experienced in the Americas and Europe, where the Company has a broad base of factory automation customers, and in Asia, particularly in China, where the Company has expanded its sales and support infrastructure in order to access more of the machine vision market in this high-potential growth region. Revenue in Japan was lower for both the three-month and six-month periods as manufacturers in this region continue to recover from the March 11th earthquake.
Sales to factory automation customers increased by $9,374,000, or 18%, from the first quarter of 2011. However, we anticipate revenue for this market will be down slightly for the third quarter compared to the second quarter of 2011 due to lower demand typically experienced during the summer months, particularly from our European customers. We also expect demand from our Japanese customers to continue to be negatively impacted in the third quarter by the aftermath of the March earthquake.
Semiconductor and Electronics Capital Equipment
Sales to customers who make automation equipment for the semiconductor and electronics industries, which are included in the Company’s MVSD segment, represented 13% and 15% of total revenue for the three-month and six-month periods in 2011, respectively, compared to 16% for those same periods in 2010. Sales to these customers decreased by $224,000, or 2%, for the three-month period and increased by $3,020,000, or 14%, for the six-month period. Although sales to these customers decreased from the first quarter to the second quarter of 2011, a relatively strong first quarter contributed to the overall increase that occurred for

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the six-month period. The semiconductor and electronics capital equipment market has historically been highly cyclical and management has limited visibility regarding future order levels from these customers.
Surface Inspection
Sales to surface inspection customers, which comprise the Company’s SISD segment, represented 13% of total revenue for both the three-month and six-month periods in 2011, compared to 15% and 14% for the same periods in 2010. Revenue from these customers decreased by $196,000, or 2%, for the three-month period due to lower product revenue, primarily resulting from two significant Japanese orders for which revenue was recognized in the second quarter of 2010 that did not repeat in 2011, partially offset by higher service revenue. In the six-month period, revenue from these customers increased by $1,602,000, or 9%, as a result of higher service revenue from customer installations, training, and support. The revenue reported each quarter can vary depending upon the timing of customer orders, system deliveries, and installations, as well as the impact of revenue deferrals.
Product Revenue
Product revenue increased by $10,499,000, or 16%, for the three-month period and increased by $24,763,000, or 20%, for the six-month period due primarily to a higher volume of vision systems sold to customers in the factory automation market. The impact of the higher volume was partially offset by lower average selling prices, as the Company introduced new products at lower price points.
Service Revenue
Service revenue, which is derived from the sale of maintenance and support, education, consulting, and installation services, increased by $1,083,000, or 23%, for the three-month period and increased by $2,246,000, or 25%, for the six-month period primarily due to higher revenue from SISD installation, training, and support services, as well as higher revenue from MVSD consulting services. Service revenue was consistent as a percentage of total revenue at 7% for both the three-month and six-month periods of 2011 and 2010.
Gross Margin
Gross margin as a percentage of revenue was 77% and 76% for the three-month and six-month periods in 2011, respectively, compared to 74% and 73% for the same periods in 2010. This increase was due to higher MVSD and SISD margins, as well as a greater percentage of total revenue from the sale of modular vision systems, which have higher margins than the sale of surface inspection systems.
MVSD Margin
MVSD gross margin as a percentage of revenue was 81% and 80% for the three-month and six-month periods in 2011, respectively, compared to 79% for the same periods in 2010. The increase in MVSD margin was primarily due to manufacturing efficiencies achieved from higher revenue levels, as certain fixed manufacturing costs were spread over a higher revenue base.
SISD Margin
SISD gross margin as a percentage of revenue was 51% and 49% for the three-month and six-month periods in 2011, respectively, compared to 45% and 43% for the same periods in 2010. The increase in SISD margin was primarily due to improved service margins, as well as improved product margins resulting from low-cost sourcing initiatives and a greater volume of system upgrades in the second quarter of 2011, which yield higher margins than new systems.
Product Margin
Product gross margin as a percentage of revenue was 79% and 78% for the three-month and six-month periods in 2011, respectively, compared to 76% for those same periods in 2010. This increase was due to

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higher MVSD and SISD product margins as described above, as well as a greater percentage of total revenue from the sale of modular vision systems, which have higher margins than the sale of surface inspection systems.
Service Margin
Service gross margin as a percentage of revenue was 50% and 45% for the three-month and six-month periods in 2011, respectively, compared to 41% and 36% for the same periods in 2010. The increase in service margin was primarily due to a higher volume of SISD installation and support services, with only slight increases to the related costs.
Operating Expenses
Research, Development, and Engineering Expenses
Research, development, and engineering (RD&E) expenses increased by $2,430,000, or 30%, over the equivalent three-month period in 2010 and increased by $3,809,000, or 24%, over the equivalent six-month period in 2010. MVSD RD&E expenses increased by $2,571,000, or 36%, for the three-month period and increased by $4,032,000, or 28%, for the six-month period, while SISD RD&E expenses decreased by $141,000, or 15%, for the three-month period and decreased by $223,000, or 12%, for the six-month period.
The table below details the $2,571,000 and $4,032,000 net increase in MVSD RD&E for the three-month and six-month periods, respectively:
                      
  Three-Month   Six-Month  
   
Period
   
Period
 
MVSD RD&E expenses in 2010
  $   7,162     $ 14,394  
Personnel-related costs
    1,096       2,185  
Stock-based compensation expense
    432       1,002  
Patent-related costs
    180       243  
Foreign currency exchange rate changes
    212       162  
Company bonus accruals
    223       79  
Other
    428       361  
 
           
 
MVSD RD&E expenses in 2011
  $   9,733     $ 18,426  
 
           
Over the past few quarters, the Company has increased RD&E headcount in strategic areas, resulting in higher personnel-related costs, such as salaries and fringe benefits. The Company also recorded increased stock-based compensation expense due to a higher valuation of stock options granted in the first quarter of 2011, higher costs to patent new technology, and increased company bonus accruals based on the Company’s operating income margin. In addition, a weaker U.S. Dollar in 2011 compared to the prior year resulted in higher RD&E costs when expenses of the Company’s foreign operations were translated to U.S. Dollars.
The decrease in SISD RD&E expenses for both the three-month and six-month periods was primarily due to a change in personnel mix, resulting in savings in salaries, fringe benefits, and company bonus expense ($122,000 for the three-month period and $230,000 for the six-month period).
RD&E expenses as a percentage of revenue were 13% for both the three-month and six-month periods in 2011, compared to 11% and 12% for the same periods in 2010. We believe that a continued commitment to RD&E activities is essential in order to maintain or achieve product leadership with our existing products and to provide innovative new product offerings, and therefore, we expect to continue to make RD&E investments in the future in strategic areas, such as the ID products business and the further development of a “Vision System on a Chip.” In addition, we consider our ability to accelerate time to market for new products to be critical to our revenue growth. Although we target our RD&E spending to be between 10% and 15% of revenue, this percentage is impacted by revenue levels.
Selling, General, and Administrative Expenses

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Selling, general, and administrative (SG&A) expenses increased by $3,728,000, or 14%, over the equivalent three-month period in 2010 and increased by $9,267,000, or 19%, over the equivalent six-month period in 2010. MVSD SG&A expenses increased by $5,259,000, or 29%, for the three-month period and increased by $10,633,000, or 30%, for the six-month period, while SISD SG&A expenses increased by $152,000, or 6%, for the three-month period and increased by $366,000, or 7%, for the six-month period. Corporate expenses that are not allocated to either division decreased by $1,683,000, or 35%, for the three-month period and decreased by $1,732,000, or 20%, for the six-month period.
The table below details the $5,259,000 and $10,633,000 net increase in MVSD SG&A for the three-month and six-month periods, respectively:
                     
    Three-Month    Six-Month
   
Period
   
Period
 
MVSD SG&A expenses in 2010
  $ 18,287     $ 35,201  
Personnel-related costs
    2,735       5,353  
Foreign currency exchange rate changes
    1,412       1,814  
Stock-based compensation expense
    553       1,607  
Marketing and promotional expenses
    674       1,387  
Other
    (115 )     472  
 
           
 
MVSD SG&A expenses in 2011
  $ 23,546     $ 45,834  
 
           
Over the past few quarters, the Company has increased SG&A headcount in strategic areas, resulting in higher personnel-related costs, such as salaries, fringe benefits, commissions, and travel expenses. The Company also recorded increased stock-based compensation expense due to a higher valuation of stock options granted in the first quarter of 2011. For the six-month period, the increase in stock-based compensation was also due to a high level of credits recorded in the first quarter of 2010 related to forfeited options. Other increases included higher spending on marketing and promotional activities intended to grow factory automation revenue and the unfavorable impact of changes in foreign currency exchange rates.
The increase in SISD SG&A expense was primarily due to the unfavorable impact of changes in foreign currency exchange rates ($126,000 for the three-month period and $165,000 for the six-month period) and increased stock-based compensation expense ($87,000 for the three-month period and $142,000 for the six-month period).
The decrease in corporate expenses was due to lower legal fees primarily related to patent infringement actions ($1,845,000 for the three-month period and $3,207,000 for the six-month period). These savings were partially offset by increased stock-based compensation expense due to a higher valuation of stock options ($307,000 for the three-month period and $852,000 for the six-month period). For the six-month period, the Company also incurred costs associated with the Company’s 30th Anniversary parties held in the first quarter of 2011 ($480,000).
Nonoperating Income (Expense)
The Company recorded foreign currency gains of $210,000 and $151,000 for the three-month and six-month periods in 2011, respectively, compared to losses of $8,000 and $173,000 for the same periods in 2010. The foreign currency gains and losses in each period resulted primarily from the revaluation and settlement of accounts receivable and intercompany balances that are reported in one currency and collected in another. Although the foreign currency exposure of accounts receivable is largely mitigated through the use of forward contracts, this program depends upon forecasts of sales and collections, and therefore, gains or losses on the underlying receivables may not perfectly offset losses or gains on the contracts.
Investment income increased by $389,000, or 126%, for the three-month period and increased by $737,000, or 130%, for the six-month period. For the three-month period, the increase was primarily due to improving yields on the Company’s portfolio of debt securities. For the six-month period, the increase was primarily due to improving yields, as well as an increase in funds available for investment.
The Company recorded other expense of $148,000 and $353,000 for the three-month and six-month periods in 2011, respectively, compared to other expense of $156,000 and $402,000 for the three-month and six-month periods in 2010. Other income (expense) includes rental income, net of associated expenses, from

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leasing buildings adjacent to the Company’s corporate headquarters. A portion of this space is currently unoccupied.
Income Tax Expense (Benefit)
The Company’s effective tax rate was 23% for both the three-month and six-month periods in 2011 and 2010. There were no discrete tax events in any period.
Liquidity and Capital Resources
The Company has historically been able to generate positive cash flow from operations, which has funded its operating activities and other cash requirements and has resulted in an accumulated cash, cash equivalent, and investment balance of $353,388,000 as of July 3, 2011. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity.
The Company’s cash requirements during the six-month period in 2011 were met with its existing cash balances, cash from investment maturities, positive cash flows from operations, and proceeds from stock option exercises. Cash requirements primarily consisted of operating activities, purchases of investments, capital expenditures, and the payment of dividends. Capital expenditures for the six-month period in 2011 totaled $3,625,000 and consisted primarily of expenditures for computer hardware, computer software, and manufacturing test equipment for new product introductions.
In June 2000, the Company became a Limited Partner in Venrock Associates III, L.P. (Venrock), a venture capital fund. The Company has committed to a total investment in the limited partnership of up to $20,500,000, with the commitment period expiring on December 31, 2013. The Company does not have the right to withdraw from the partnership prior to December 31, 2013. As of July 3, 2011, the Company had contributed $19,886,000 to the partnership. No contributions were made and no distributions were received during the six-month period in 2011. The remaining commitment of $614,000 can be called by Venrock in any period through December 31, 2013.
Beginning in the third quarter of 2003, the Company’s Board of Directors has declared and paid a cash dividend in each quarter, including dividends of $0.08 per share in the first quarter of 2011 and $0.09 per share in the second quarter of 2011 that amounted to $7,096,000 for the six-month period in 2011. Future dividends will be declared at the discretion of the Company’s Board of Directors and will depend upon such factors as the Board deems relevant including, among other things, the Company’s ability to generate positive cash flows from operations.
In April 2008, the Company’s Board of Directors authorized the repurchase of up to $50,000,000 of the Company’s common stock. As of July 3, 2011, the Company had repurchased 1,038,797 shares at a cost of $20,000,000 under this program. The Company did not purchase any shares under this program during the six-month period in 2011. The Company may repurchase shares under this program in future periods depending upon a variety of factors, including, among other things, stock price levels, share availability, and cash reserve requirements.
The Company believes that its existing cash, cash equivalents, and investments balances, together with cash flow from operations, will be sufficient to meet its operating, investing, and financing activities for the next twelve months. As of July 3, 2011, the Company had approximately $347,455,000 in either cash or investments that could be converted into cash. In addition, Cognex has no long-term debt and does not anticipate needing debt financing in the near future. We believe that our strong cash position has put us in a relatively good position with respect to our longer-term liquidity needs.
New Pronouncements
In the second quarter of 2011, the Financial Accounting Standards Board (FASB) issued the following accounting standards updates aimed at converging U.S. GAAP with international standards.
Accounting Standards Update (ASU) 2011-04, “Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”

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The amendments in this ASU change certain aspects of the fair value measurement guidance in Accounting Standards Codification (ASC) 820, “Fair Value Measurement”, including the application of the concepts of highest and best use and valuation premise, introduction of an option to measure groups of offsetting assets and liabilities on a net basis, incorporation of certain premiums and discounts in fair value measurements, and measurement of the fair value of certain instruments classified in shareholders’ equity. In addition, the amended guidance includes new fair value disclosure requirements, including, among other things, information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and a narrative description of Level 3 measurements’ sensitivity to changes in unobservable inputs. ASU 2011-04 must be applied prospectively and is effective for the first quarter of 2012. Management is in the process of evaluating the impact of this ASU.
Accounting Standards Update (ASU) 2011-05, “Comprehensive Income”
The amendments in this ASU revise the manner in which companies present comprehensive income in their financial statements. This ASU requires companies to report the components of comprehensive income in either a continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement would present the components of net income, similar to the Company’s current Consolidated Statements of Operations, while the second statement would include the components of other comprehensive income (OCI), as well as a cumulative total for comprehensive income. This ASU does not change the items that must be reported in OCI. ASU 2011-05 must be applied retrospectively and is effective for the first quarter of 2012. Management is in the process of evaluating the presentation options required by this ASU.
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, 2010.
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 defined in such rules) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures were effective as of that date. From time to time, the Company reviews its disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended July 3, 2011 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
     
 
 
In May 2008, the Company filed a complaint against MvTec Software GmbH, MvTec LLC, and Fuji America Corporation in the United States District Court for the District of Massachusetts alleging infringement of certain patents owned by the Company. In April 2009 and again in June 2009, Defendant MvTec Software GmbH filed re-examination requests of the patents-at-issue with the United States Patent and Trademark Office. This matter is ongoing.
 
   
 
 
In May 2009, the Company pre-filed a complaint with the United States International Trade Commission (ITC) pursuant to Section 337 of the Tariff Act of 1930, as amended, 19 U.S.C. §1337, against MvTec Software GmbH, MvTec LLC, Fuji America, and several other respondents alleging unfair methods of competition and unfair acts in the unlawful importation into the United States, sale for importation, or sale within the United States after importation. By this filing, the Company requested the ITC to investigate the Company’s contention that certain machine vision software, machine vision systems, and products containing the same infringe, and respondents directly infringe and/or actively induce and/or contribute to the infringement in the United States, of one or more of the Company’s U.S. patents. In July 2009, the ITC issued an order that it would institute an investigation based upon the Company’s assertions. In September 2009, the Company reached a settlement with two of the respondents, and in December 2009, the Company reached a settlement with five additional respondents. In March 2010, the Company reached a settlement with respondent Fuji Machine Manufacturing Co., Ltd. and its subsidiary Fuji America Corporation. These settlements did not have a material impact on the Company’s financial results. An ITC hearing was held in May 2010. In July 2010, the Administrative Law Judge issued an initial determination finding two of the Company’s patents invalid and that respondents did not infringe the patents-at-issue. In September 2010, the Commission issued a notice that it would review the initial determination of the Administrative Law Judge. The ITC issued its Final Determination in November 2010 in which it determined to modify-in-part and affirm-in-part the Administrative Law Judge’s determination, and terminate the investigation with a finding of no violation of Section 337 of the Tariff Act of 1930 (as amended 19 U.S.C. §1337). The Company has filed an appeal of the decision with the United States Court of Appeals for the Federal Circuit. This matter is ongoing.
 
   
 
 
The Company cannot predict the outcome of the above-referenced pending matters and an adverse resolution of these lawsuits could have a material adverse effect on the Company’s financial position, liquidity, results of operations, and/or indemnification obligations. In addition, various other claims and legal proceedings generally incidental to the normal course of business are pending or threatened on behalf of or against the Company. While we cannot predict the outcome of these incidental matters, we believe that any liability arising from them will not have a material adverse effect on our financial position, liquidity, or results of operations.
     
ITEM 1A.
  RISK FACTORS
     
 
 
For a complete list of factors that could affect the Company’s business, results of operations, and financial condition, see the risk factors discussion provided in Part I - Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The language below has been added to an existing risk factor previously included on Form 10-K to address the current risks associated with international sales.
 
   
 
 
Economic, political, and other risks associated with international sales and operations could adversely affect our business and operating results.
 
   
 
 
On March 11, 2011, a large earthquake hit the northeast region of Japan. While the majority of our customers located in Japan are outside of the affected areas, certain customers requested that orders totaling approximately $800,000, originally scheduled for March shipment, be pushed to April. The remaining orders that were on the backlog at the time of

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the earthquake, and any new orders, were fulfilled from our Cork, Ireland distribution center. Our Koriyama, Japan distribution center suspended shipments for approximately five weeks, but began shipping product again in April. Cognex does not manufacture in Japan.
 
   
 
 
Our key suppliers located in Japan are up and running, subject to power outages. Cognex has a policy of maintaining strategic inventory reserves of critical components. We have taken action to secure additional supply of Japanese-manufactured critical parts, such as imagers. For this reason, we do not expect significant supply disruption as a result of the earthquake. There is uncertainty, however, regarding how demand from our customers will be impacted in the third quarter and beyond, as the aftermath of this disaster continues to unfold through layers of the supply chain. A decrease in demand for our products and services, or the postponement or cancellation of orders from our customers, could negatively impact our business and operating results.
     
ITEM 2.
  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     
 
  The following table sets forth information with respect to purchases by the Company of shares of its Common Stock during the periods indicated:
                                 
                            Approximate  
                    Total Number     Dollar Value of  
                    of Shares     Shares that  
                    Purchased as     May Yet Be  
    Total             Part of Publicly   Purchased  
    Number of             Announced     Under the  
    Shares     Average Price     Plans or     Plans or  
    Purchased     Paid per Share    
Programs (1)
   
Programs
 
April 4 – May 1, 2011
    -       -       -     $ 30,000,000  
May 2 – May 29, 2011
    -       -       -     $ 30,000,000  
May 30 – July 3, 2011
    -       -       -     $ 30,000,000  
 
                         
Total
    -       -       -     $ 30,000,000  
  (1)  
In April 2008, the Company’s Board of Directors authorized the repurchase of up to $50,000,000 of the Company’s common stock.
     
ITEM 3.
  DEFAULTS UPON SENIOR SECURITIES
 
   
 
  None
     
ITEM 4.
  REMOVED AND RESERVED
     
ITEM 5.
  OTHER INFORMATION
 
   
 
  None
     
ITEM 6.
  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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101 – xBRL (Extensible Business Reporting Language)
The following materials from Cognex Corporation’s Quarterly Report on Form 10-Q for the period ended July 3, 2011, formatted in xBRL: (i) Consolidated Statements of Operations for the three-month and six-month periods ended July 3, 2011 and July 4, 2010; (ii) Consolidated Balance Sheets as of July 3, 2011 and December 31, 2010; (iii) Consolidated Statement of Shareholders’ Equity and Comprehensive Income for the six-month period ended July 3, 2011; (iv) Consolidated Condensed Statements of Cash Flows for the six-month periods ended July 3, 2011 and July 4, 2010; and (v) Notes to Consolidated Financial Statements.
* Filed herewith
** Furnished herewith
*** Pursuant to Rule 406T of Regulation S-T, the xBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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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 1, 2011
      COGNEX CORPORATION    
 
           
 
  By:   /s/ Robert J. Willett
 
   
 
      Robert J. Willett    
 
      President and Chief Executive Officer  
 
      (duly authorized officer, principal executive officer)  
 
           
 
  By:   /s/ Richard A. Morin
 
   
 
      Richard A. Morin    
 
      Executive Vice President of Finance and Chief Financial Officer  
 
      (duly authorized officer, principal financial and accounting
officer)
 

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