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, the expected impact of the COVID-19 pandemic on our assets, business and results of operations, customer order rates and timing of related revenue, future product mix, restructuring and other cost-savings initiatives, research and development activities, capital projects, investments, liquidity, strategic plans, and estimated tax benefits and expenses and other tax matters, 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 impact, duration and severity of the COVID-19 pandemic; (2) current and future conditions in the global economy, including the impact of the COVID-19 pandemic and the imposition of tariffs or export controls; (3) the loss of, or curtailment of purchases by, a large customer; (4) the reliance on revenue from the consumer electronics or automotive industries; (5) the inability to penetrate the logistics industry and other new markets; (6) the inability to achieve significant international revenue; (7) fluctuations in foreign currency exchange rates and the use of derivative instruments; (8) information security breaches or business system disruptions; (9) the inability to attract and retain skilled employees; (10) the failure to effectively manage our growth; (11) the reliance upon key suppliers to manufacture and deliver critical components for our products; (12) the failure to effectively manage product transitions or accurately forecast customer demand; (13) the inability to design and manufacture high-quality products; (14) the technological obsolescence of current products and the inability to develop new products; (15) the failure to properly manage the distribution of products and services; (16) the inability to protect our proprietary technology and intellectual property; (17) our involvement in time-consuming and costly litigation; (18) the impact of competitive pressures; (19) the challenges in integrating and achieving expected results from acquired businesses, including the acquisition of Sualab; (20) potential impairment charges with respect to our investments or for acquired intangible assets or goodwill; (21) exposure to additional tax liabilities; and (22) potential disruptions to our business due to restructuring activities and the failure of such activities to generate the anticipated cost savings. 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, 2019, as updated by Part II - Item 1A of this Quarterly Report on Form 10-Q. 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 manufacturing
and distribution tasks where vision is required. In addition to product revenue
derived from the sale of machine vision products, the Company also generates
revenue by providing maintenance and support, consulting, and training services
to its customers; however, service revenue accounted for less than 10% of total
revenue for all periods presented.
Cognex machine vision is used to automate manufacturing and distribution
processes in a variety of industries, where the technology is widely recognized
as an important component of automated production and quality assurance.
Virtually every manufacturer can achieve better quality and manufacturing
efficiency by using machine vision, and therefore, Cognex products are used by a
broad base of customers across a variety of industries, including consumer
electronics, automotive, consumer products, food and beverage, pharmaceuticals,
and medical devices. Cognex products are also used to automate distribution
processes in the logistics industry, including for applications in retail
distribution and ecommerce to scan, track, and sort goods through distribution
centers.
Revenue for the third quarter of 2020 totaled $251,073,000, representing an
increase of 37% from the third quarter of 2019. This increase was driven largely
by higher revenue from certain customers in the electronics industry and
ecommerce customers in the logistics industry. Both of these industries have
benefited recently from higher consumer demand during the COVID-19 pandemic.
These increases were partially offset by lower revenue from
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customers in the automotive industry, which represented our largest industry in
terms of revenue for fiscal year 2019, and continues to be negatively impacted
by global economic conditions resulting from the COVID-19 pandemic.
Gross margin was 76% for the third quarter of 2020 compared to 74% for the third
quarter of 2019. Margin expansion was due to the favorable impact of the higher
revenue on fixed manufacturing costs, as well as favorable product mix toward
relatively higher-margin electronics revenue. Operating expenses increased by 2%
from the third quarter of 2019, as incentive compensation accruals were
partially offset by lower travel expenses resulting from COVID-19 restrictions.
We reported operating income of 38% of revenue in the third quarter of 2020
compared to 24% of revenue in the third quarter of 2019, demonstrating the
substantial operating leverage from the incremental revenue. We reported net
income of 35% of revenue in the third quarter of 2020, or $0.49 per share,
compared to 23% of revenue in the third quarter of 2019, or $0.24 per share.
Results of Operations
Revenue
Revenue increased by $67,748,000, or 37%, for the three-month period and
$31,549,000, or 6%, for the nine-month period. The increase was due largely to
higher revenue from large customer deployments in the electronics industry and
ecommerce customers in the logistics industry, which have experienced a
significant increase in demand during the COVID-19 pandemic. In contrast, other
industries we serve have experienced significantly lower demand, including the
automotive industry, which was our largest industry in terms of revenue for
fiscal year 2019. Accordingly, significant portions of our business have been
adversely and materially impacted by deteriorating economic conditions resulting
from the COVID-19 pandemic. Although revenue from customers in the automotive
industry was lower than the prior year for both the three-month and nine-month
periods, revenue from customers in this industry increased sequentially from the
second quarter of 2020. In addition, revenue from customers in certain
industries in which we have a smaller presence, including medical devices,
pharmaceuticals, and life sciences, also increased sequentially from the prior
quarter. Although we continue to experience certain disruptions to our business
from COVID-19 and the situation is continuously changing, these conditions have
improved in the third quarter.
From a geographic perspective, revenue from customers based in the Americas
increased by 33% for the three-month period and 4% for the nine-month period due
primarily to higher revenue in the logistics industry, partially offset by lower
revenue in the automotive industry, for which the decrease was more significant
in the nine-month period. Revenue from customers based in Europe was relatively
flat for the three-month period and decreased by 20% for the nine-month period
due primarily to lower sales in the automotive and electronics industries.
Revenue from customers based in Greater China increased by 152% for the
three-month period and 52% for the nine-month period due primarily to higher
revenue in the electronics industry, partially offset by lower revenue in the
automotive industry, for which the decrease was more significant in the
nine-month period. In recent years, there has been a shift in procurement for
certain electronics orders for Cognex products used on assembly lines in China.
This procurement shift has resulted in an increase in revenue reported in
Greater China that was previously reported in Europe. Revenue from other
countries in Asia was relatively flat for the three-month period and increased
by 15% for the nine-month period due primarily to higher revenue in the
electronics industry.
As of the date of this report, we expect revenue for the fourth quarter of 2020
to be lower than the third quarter of 2020 but higher than the fourth quarter of
2019. The decrease from the third quarter of 2020 is expected to result from
lower revenue in the electronics industry. The Company's revenue in this
industry has an annual cycle based on large customer deployments, with higher
revenue quarters typically in the second or third quarters or a combination of
both. This year's revenue was primarily concentrated in the third quarter.
Although we expect revenue in the electronics industry to be sequentially lower
in the fourth quarter of 2020, we anticipate that it will be higher than the
fourth quarter of 2019, as we expect to continue to benefit from higher consumer
demand for electronics products during the COVID-19 pandemic. We also expect
revenue in the logistics industry in the fourth quarter of 2020 to be higher
than the same quarter in 2019 due to continued strength in the ecommerce sector.
Anticipated growth in electronics and logistics is expected to be partially
offset by lower revenue in the automotive industry and certain other industries
that have been adversely impacted by the COVID-19 pandemic. It is difficult for
us to quantify the future impact of COVID-19 due to many factors beyond our
control and knowledge, including changing governmental regulations and the scope
and duration of social distancing and commerce restrictions, including access to
customer facilities for on-site installations.
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Gross Margin
Gross margin as a percentage of revenue was 76% and 74% for the three-month and
nine-month periods in 2020, respectively, compared to 74% for both periods in
2019. The increase in the gross margin percentage was primarily due to the
favorable impact of the higher revenue on fixed manufacturing costs, as well as
favorable product mix toward relatively higher-margin electronics revenue. This
impact was partially offset by higher provisions for excess and obsolete
inventories for the nine-month period, which totaled $9,386,000 and $4,121,000
for the nine-month periods in 2020 and 2019, respectively. The higher level of
provisions recorded in the nine-month period in 2020 was due to lower projected
sales of excess inventories as a result of the deteriorating global economic
conditions from the COVID-19 pandemic.
As of the date of this report, we expect gross margin as a percentage of revenue
for the fourth quarter of 2020 to be in the mid-70s range, but lower than the
percentage reported in the third quarter of 2020 due to the anticipated lower
revenue level and less favorable product mix.
Operating Expenses
Research, development, and engineering (RD&E) expenses increased by $2,125,000,
or 8%, for the three-month period and increased by $10,147,000, or 12%, for the
nine-month period as detailed in the table below (in thousands).
                                      Three-month period       Nine-month period
RD&E expenses in 2019                $            28,115      $           86,436
Incentive compensation                             2,311                   4,860
Acquisition deferred compensation                  1,310                   3,930
Personnel-related costs                             (711)                  2,322
Travel expenses                                     (581)                 (1,352)
Stock expenses                                      (870)                 (1,042)
Other                                                666                   1,429
RD&E expenses in 2020                $            30,240      $           96,583

The Company recorded higher incentive compensation accruals for annual plans with relevant performance goals for 2020. We will continue to monitor the achievement of these performance goals for the remainder of the year due to the impact of COVID-19 on our business, among other factors, which may result in adjustments to our incentive compensation accruals in the fourth quarter. RD&E expenses also increased due to higher compensation costs from the Company's acquisition of Sualab in the fourth quarter of 2019. The consideration for this acquisition included deferred payments that are being recorded as compensation expense over four years from the closing date, which accounted for an increase in RD&E expense of $1,310,000 for the three-month period and $3,930,000 for the nine-month period. Although this acquisition also resulted in higher personnel-related costs from headcount additions related to a team of deep learning engineers, the impact of this incremental headcount was offset by a workforce reduction in the second quarter of 2020. These increases were partially offset by lower travel expenses resulting from COVID-19 restrictions. We expect these restrictions to continue in the fourth quarter of 2020. The Company also recorded lower stock expense as a result of a lower total value of awards granted in 2020 as compared to 2019, as well as the impact on the timing of stock expense recognition from a shift in our compensation practices toward the granting of restricted stock units with cliff vesting. In addition, credits were recorded to stock expense in the second quarter of 2020 for awards cancelled as a result of a workforce reduction. RD&E expenses as a percentage of revenue were 12% and 16% for the three-month and nine-month periods in 2020, respectively, compared to 15% and 16% for the same periods in 2019. 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, as well as to provide engineering support for large customers. In addition, we consider our ability to accelerate time to market for new products to be critical to our revenue growth. We currently expect to continue to make significant RD&E investments to support our product development plans during the COVID-19 pandemic and other business disruptions generally.


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Selling, General, and Administrative Expenses Selling, general, and administrative (SG&A) expenses were relatively flat for the three-month period and decreased by $6,045,000, or 3%, for the nine-month period as detailed in the table below (in thousands).


                                           Three-month period       Nine-month period
SG&A expenses in 2019                     $            64,486      $          199,542
Travel expenses                                        (3,659)                (10,247)
Contract labor                                           (797)                 (1,923)
Foreign currency exchange rate changes                    270                  (1,587)
Marketing programs                                       (125)                 (1,356)
Incentive compensation                                  5,863                   9,646
Personnel-related costs                                (1,195)                  1,412
Other                                                    (637)                 (1,990)
SG&A expenses in 2020                     $            64,206      $          193,497



SG&A expenses decreased due to lower travel expenses resulting from COVID-19
restrictions. We expect these restrictions to continue in the fourth quarter of
2020. In addition, the Company reduced spending on contract labor and marketing
programs as part of actions taken to reduce operating costs during the global
pandemic. Foreign currency exchange rate changes also resulted in a lower level
of SG&A expenses for the nine-month period, as costs denominated in foreign
currencies were translated to U.S. Dollars at a lower rate due to a relatively
stronger U.S. Dollar.
These decreases were partially offset by higher incentive compensation accruals
for annual plans with relevant performance goals for 2020. We will continue to
monitor the achievement of these performance goals for the remainder of the year
due to the impact of COVID-19 on our business, among other factors, which may
result in adjustments to our incentive compensation accruals in the fourth
quarter. Personnel-related costs were lower for the three-month period due to
the impact of a workforce reduction in the second quarter of 2020.
Restructuring Charges
On May 26, 2020, the Company's Board of Directors approved a restructuring plan
intended to reduce the Company's operating costs, optimize its business model,
and address the impact of the COVID-19 pandemic. The restructuring plan included
a global workforce reduction of approximately 8% and office closures. The
Company estimates the total restructuring charges from these actions to be
approximately $15,388,000, of which $14,798,000 was recorded in the second
quarter and $251,000 was recorded in the third quarter of 2020. The second
quarter charge of $251,000 included a net favorable adjustment of $663,000
resulting from actual costs coming in lower than original estimates. The
remaining charge of approximately $339,000 is expected to be recorded in the
fourth quarter of 2020.
The actions described above, together with actions already taken to reduce the
Company's overall costs, were designed to generate an aggregate annualized cost
savings of approximately $25,000,000 versus the Company's original planned cost
structure. Actual savings anticipated from these actions have been achieved as
expected in the third quarter of 2020 as described in personnel-related costs
savings in RD&E expenses and SG&A expenses.
Intangible Asset Impairment Charges
Deteriorating global economic conditions from the COVID-19 pandemic triggered a
review of long-lived assets for potential impairment in the second quarter of
2020. This review resulted in intangible asset impairment charges totaling
$19,571,000 recorded in the second quarter of 2020, primarily related to lower
projected cash flows from the technologies and customer relationships acquired
from Sualab.
Non-operating Income (Expense)
The Company recorded foreign currency gains of $2,357,000 and foreign currency
losses of $310,000 for the three-month and nine-month periods in 2020,
respectively, compared to foreign currency losses of $1,295,000 and $1,403,000
for the same periods in 2019. Foreign currency gains and losses result primarily
from the revaluation and settlement of accounts receivable, accounts payable,
and intercompany balances that are reported in one currency and collected in
another.
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Investment income decreased by $2,624,000, or 51%, for the three-month period
and $4,232,000, or 28%, for the nine-month period. The decrease was due to lower
yields on the Company's portfolio of debt securities.
The Company recorded other expense of $173,000 and $153,000 for the three-month
and nine-month periods in 2020, respectively, compared to other income of
$456,000 and $1,239,000 for the same periods in 2019. Other income (expense)
includes fair value adjustments of contingent consideration liabilities arising
from business acquisitions. The Company recorded favorable fair value
adjustments to its GVi contingent consideration liability in 2019, resulting
from a lower level of revenue in the Americas' automotive industry.
Income Tax Expense
The Company's effective tax rate was 14% and 12% of pre-tax income for the
three-month and nine-month periods in 2020, respectively, compared to 12% of
pre-tax income for both periods in 2019.
The effective tax rate included a decrease in tax expense of $4,354,000 and
$10,447,000 for the three-month and nine-month periods in 2020, respectively,
and $569,000 and $4,547,000 for the same periods in 2019, primarily from the
excess tax benefit arising from the difference between the deduction for tax
purposes and the compensation cost recognized for financial reporting purposes
from stock option exercises. The Company cannot predict the level of stock
option exercises by employees in future periods.
Other discrete tax items included an increase in tax expense of $129,000 and
$3,638,000 for the three-month and nine-month periods in 2020, respectively,
primarily from the final true-up of the prior year's tax accrual upon filing the
related tax return, and a decrease in tax expense of $1,327,000 and $1,330,000
for the same periods in 2019, consisting primarily of the expiration of the
statutes of limitations for certain reserves for income tax uncertainties.
Excluding the impact of these discrete items, the Company's effective tax rate
was 18% of pre-tax income for the three-month and nine-month periods in 2020,
respectively, compared to 16% for the same periods in 2019. The increase in the
effective tax rate, excluding the impact of discrete items, was due to more of
the Company's profits being earned and taxed in higher tax jurisdictions.
The Company has filed its U.S. federal tax return in the fourth quarter of 2020
for tax year 2019, and as a result, is expected to record a discrete tax benefit
in excess of $12,000,000 in the fourth quarter. This benefit was the result of
new regulations issued by the IRS relating to the use of foreign tax credits as
allowable to reduce the tax associated with foreign operations under Global
Intangible Low-Taxed Income ("GILTI"). These credits were generated from taxes
paid relating to the acquisition of Sualab in October 2019.

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 and investment balance of
approximately $1 billion as of September 27, 2020. The Company has established
guidelines relative to credit ratings, diversification, and maturities of its
investments that maintain liquidity.
The Company's cash requirements for the nine-month period ended September 27,
2020 were primarily met with positive cash flows from operations and the
proceeds from stock option exercises. Cash requirements consisted of operating
activities, the repurchase of common stock, the payment of dividends, and
capital expenditures. Capital expenditures for the nine-month period ended
September 27, 2020 totaled $9,829,000 and consisted primarily of computer
hardware and software, manufacturing test equipment related to new product
introductions, and improvements made to the Company's headquarters building in
Natick, Massachusetts and various leased facilities. The Company currently
intends to continue to invest in capital projects, particularly related to its
management information systems, that we believe are important to support our
longer-term growth objectives.
The Company implemented a variety of cost-cutting measures in the second quarter
of 2020 to address the impact of the COVID-19 pandemic, including a workforce
reduction and office closures. The Company estimates the total restructuring
charges from these actions to be approximately $15,388,000, of which $2,957,000
represents non-cash charges and adjustments, $8,775,000 was paid in the second
and third quarters of 2020, and the remainder is expected to be paid out in the
fourth quarter of 2020.
In October 2018, the Company's Board of Directors authorized the repurchase of
$200,000,000 of the Company's common stock. As of September 27, 2020, the
Company repurchased 2,816,000 shares at a cost of $121,348,000 under this
program, including 1,215,000 shares at a cost of $51,036,000 in the first
quarter of 2020, leaving a remaining balance of $78,652,000. No shares were
repurchased during the second or third quarters of 2020. On March 12, 2020 the
Company's Board of Directors authorized the repurchase of an additional
$200,000,000 of the Company's common stock. Purchases under this March 2020
program will commence upon completion of the
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October 2018 program. The Company may repurchase shares under these programs in future periods depending on a variety of factors, including, among other things, the impact of dilution from employee equity awards, stock price, share availability, and cash requirements. The Company is authorized to make repurchases of its common stock through open market purchases, pursuant to Rule 10b5-1 trading plans, or in privately negotiated transactions. The Company's Board of Directors declared and paid cash dividends of $0.050 per share in the first, second, and third quarters of 2019. The dividend was increased to $0.055 per share in the fourth quarter of 2019, as well as the first, second, and third quarters of 2020. Total dividends paid amounted to $28,554,000 for the nine-month period ended September 27, 2020. 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. The Company believes that its existing cash and investment 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 September 27, 2020, the Company had approximately $1 billion in cash and investments. In addition, the Company 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 to maintain our liquidity during downturns in our business related to COVID-19 and with respect to our longer-term liquidity needs.

New Pronouncements Refer to Part I - Note 2 within this Form 10-Q, for a full description of recently issued accounting pronouncements including the expected dates of adoption and the expected impact on the financial position and results of operations of the Company.

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