10-K 1 cgnx-20151231x10xk.htm 10-K 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2015 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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, par value $.002 per share
 
The NASDAQ Stock Market LLC
Preferred Stock Purchase Rights
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
 
Yes
 
X
  
 
 
No
  
 
  
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
 
Yes
 
               
  
 
 
No
  
X       
  
 
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    [  X  ]
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):
x  Large accelerated filer
 
¨  Accelerated filer
¨  Non-accelerated filer (Do not check if a smaller reporting company)
 
¨ 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       
  
 
Aggregate market value of voting stock held by non-affiliates of the registrant as of July 5, 2015: $3,975,185,000
Common stock, par value $.002 per share, outstanding as of January 31, 2016: 84,885,334 shares
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant intends to file a Definitive Proxy Statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2015. Portions of such Proxy Statement are incorporated by reference in Part III of this report.



COGNEX CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2015
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PART I
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Federal Securities Laws. 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. Our future results may differ materially from current results and from those projected in the forward-looking statements as a result of known and unknown risks and uncertainties. Readers should pay particular attention to considerations described in the section captioned “Risk Factors,” appearing in Part I - Item 1A of this Annual Report on Form 10-K. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We disclaim 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.
Unless the context otherwise requires, the words “Cognex®,” the “Company,” “we,” “our,” “us,” and “our company” refer to Cognex Corporation and its consolidated subsidiaries.
ITEM 1: BUSINESS
Corporate Profile
Cognex Corporation was incorporated in Massachusetts in 1981. Our corporate headquarters are located at One Vision Drive, Natick, Massachusetts 01760 and our telephone number is (508) 650-3000.
Cognex 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. Machine vision products are used to automate the manufacture and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires, by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Machine vision is important for applications in which human vision is inadequate to meet requirements for size, accuracy, or speed, or in instances where substantial cost savings are obtained through the reduction of labor or improved product quality. Today, many types of manufacturing equipment require machine vision because of the increasing demands for speed and accuracy in manufacturing processes, as well as the decreasing size of items being manufactured.
What is Machine Vision?
Since the beginning of the Industrial Revolution, human vision has played an indispensable role in the process of manufacturing products. Human eyes did what no machines could do themselves: locating and positioning work, tracking the flow of parts, and inspecting output for quality and consistency. Today, however, the requirements of many manufacturing processes have surpassed the limits of human eyesight. Manufactured items often are produced too quickly or with tolerances too small to be analyzed by the human eye. In response to manufacturers’ needs, “machine vision” technology emerged, providing manufacturing equipment with the gift of sight. Machine vision systems were first widely embraced by manufacturers of electronic components who needed this technology to produce computer chips with decreasing geometries. However, advances in technology and ease-of-use, combined with the decreasing cost of implementing vision applications, have made machine vision available to a broader range of users.

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Machine vision products combine cameras with intelligent software to collect images and then answer questions about these images, such as:
Question
  
Description
  
Example
GUIDANCE
  
 
  
 
Where is it?
  
Determining the exact physical location and orientation of an object.
  
Determining the position of a printed circuit board so that a robot can automatically be guided to place electronic components.
IDENTIFICATION
  
 
  
 
What is it?
  
Identifying an object by analyzing its physical appearance or by reading a serial number or symbol.
  
Reading a two-dimensional barcode directly marked on an automotive airbag so that it can be tracked and processed correctly through manufacturing.
INSPECTION
  
 
  
 
How good is it?
  
Inspecting an object for flaws or defects.
  
Checking for debris to ensure that foreign objects are not present in a product before shipping to consumers.
GAUGING
  
 
  
 
What size is it?
  
Determining the dimensions of an object.
  
Determining the diameter of a bearing prior to final assembly.
Machine Vision Market
Cognex machine vision is primarily used in the manufacturing sector, where the technology is widely recognized as an important component of automated production and quality assurance. In this sector, the Company’s customers are primarily in the factory automation market. 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 market includes a broad base of customers across a variety of industries, including consumer electronics, automotive, consumer products, food and beverage, medical devices, and pharmaceuticals. Factory automation customers also purchase Cognex 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 95% of total revenue in 2015 compared to 94% of total revenue in 2014.
A small percentage of our customers are in the semiconductor and electronics capital equipment market. These customers 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 customers has been relatively flat on an annual basis for the past several years. Sales to semiconductor and electronics capital equipment manufacturers represented only 5% of total revenue in 2015 compared to 6% of total revenue in 2014.
In 2015 and 2014, direct and indirect revenue from Apple Inc. accounted for 18% and 16% of total revenue, respectively. In 2013, no customer accounted for greater than 10% of total revenue.
Business Strategy
Our goal is to expand our position as a leading worldwide provider of machine vision products. Sales to customers in the factory automation market represent the largest percentage of our total revenue, and we believe that this market provides the greatest potential for long-term revenue growth.
In order to grow the factory automation market, we have invested in developing new products and functionality that make vision easier to use and more affordable, and therefore, available to a broader base of customers. This investment includes selective expansion into new industrial vision applications through internal development, as well as the acquisition of businesses and technologies. We have also invested in building a worldwide sales and support infrastructure in order to access more of the potential market for machine vision. This investment includes opening sales offices in emerging markets, such as China, India, Brazil, and Eastern Europe, where we believe many manufacturers can benefit from incorporating machine vision into their production processes, and developing strategic alliances with other leading providers of factory automation products.
Acquisitions and Divestitures
Our business strategy includes selective expansion into new machine vision applications and markets through the acquisition of businesses and technologies. We plan to continue to seek opportunities to expand our product line, customer base, distribution network, and technical talent through acquisitions in the machine vision industry.

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On July 6, 2015, we completed the sale of our Surface Inspection Systems Division (SISD) to AMETEK, Inc. for $156 million in cash. The after-tax gain associated with this sale was $78 million. SISD specializes in machine vision products that inspect the surfaces of materials processed in a continuous fashion. SISD did not meet our long-term objectives and its divestiture was a strategic decision for us. With this sale, we intend to focus our efforts on discrete manufacturing where we see the greatest growth potential. The financial results of SISD are reported as a discontinued operation in this Annual Report on Form 10-K and all prior period comparative financial data have been reported excluding SISD.
We had previously reported SISD as one of our two segments. Given the disposition of the SISD segment, management reviewed its segment reporting and concluded that the Company now operates in one segment, machine vision technology. We offer a variety of machine vision products that have similar economic characteristics, have the same productions processes, and are distributed by the same sales channels to the same types of customers. Information about segments may be found in Note 18 to the Consolidated Financial Statements, appearing in Part II - Item 8 of this Annual report on Form 10-K.
On August 21, 2015, we acquired selected assets of Manatee Works, Inc., a privately-held U.S.-based developer of barcode scanning software development kits (SDKs). We plan to leverage Manatee's current developer network and business model of attracting new developers to drive leads for our ID products. As a result of this transaction, we also acquired technology for use in mobile devices. We paid $1 million in cash upon closing and may pay additional contingent cash consideration of up to $5 million over the next three years based upon certain milestone revenue levels.
Management considers business acquisitions to be an important part of our growth strategy, and although we continue to actively seek out acquisition opportunities, we are selective in choosing businesses that we believe will enhance our long-term growth rate and profitability.
Products
Cognex offers a full range of vision and ID products designed to meet customer needs at different performance and price points. Our products range from low-cost vision sensors that are easily integrated, to PC-based systems for users with more experience or more complex requirements. Our products also have a variety of physical forms, depending upon the user’s need. For example, customers can purchase vision software to use with their own camera and processor, or they can purchase a standalone unit that combines camera, processor, and software into a single package.
Vision Software
Vision software provides users with the most flexibility by combining the full general-purpose library of Cognex vision tools with the cameras, frame grabbers, and peripheral equipment of their choice. The vision software may run on the customer’s PC, which enables easy integration with PC-based data and controls. Applications based upon Cognex vision software perform a wide range of vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance. Cognex's VisionPro® software offers an extensive suite of patented vision tools for advanced programming, while Cognex Designer allows customers to build complete vision applications with the simplicity of a graphical, flowchart-based programming environment. Cognex also offers a series of Displacement Sensors that are sold with vision software for use in highly demanding three-dimensional applications.
Vision Systems
Vision systems combine camera, processor, and vision software into a single, rugged package with a simple and flexible user interface for configuring applications. These general-purpose vision systems are designed to be easily programmed to perform a wide range of vision tasks including part location, identification, measurement, assembly verification, and robotic guidance. Cognex offers the In-Sight® product line of vision systems in a wide range of models to meet various price and performance requirements.
Vision Sensors
Unlike general-purpose vision systems that can be programmed to perform a wide variety of vision tasks, vision sensors are designed to deliver very simple, low-cost, reliable solutions for a limited number of common vision applications such as checking the presence and size of parts. Cognex offers the Checker® product line of vision sensors that performs single-purpose vision tasks. Late in 2015, Cognex introduced a new vision sensor, the In-Sight 2000 Series, which combines the power of an In-Sight vision system with the simplicity and affordability of a vision sensor.
ID Products
ID products quickly and reliably read codes (e.g., one-dimensional barcodes or two-dimensional data matrix codes) that have been applied to, or directly marked on, discrete items during the manufacturing process. Manufacturers of goods ranging from automotive parts, pharmaceutical items, aircraft components, and medical devices are increasingly using direct part mark (DPM) identification to ensure that the appropriate manufacturing processes are performed in

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the correct sequence and on the right parts. In addition, DPM is used to track parts from the beginning of their life to the end, and is also used in supply chain management and repair.
Cognex also offers applications in the automatic identification market outside of the manufacturing sector, such as using ID products in logistics automation for package sorting and distribution. As shipping volumes grow, more distribution centers are choosing to upgrade their traditional laser-based scanners to image-based barcode readers, which will cost-effectively increase package sorter efficiency and throughput by improving read rates. Cognex offers the DataMan® product line of ID readers that includes both hand-held and fixed-mount models.
Research, Development, and Engineering
Cognex engages in research, development, and engineering (RD&E) to enhance our existing products and to develop new products and functionality to meet market opportunities. In addition to internal research and development efforts, we intend to continue our strategy of gaining access to new technology through strategic relationships and acquisitions where appropriate.
As of December 31, 2015, Cognex employed 352 professionals in RD&E, many of whom are software developers. Cognex’s RD&E expenses totaled $69,791,000 in 2015, $55,831,000 in 2014, and $44,315,000 in 2013, or approximately 15%, 13%, and 15% of revenue, respectively. 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. Therefore, we expect to continue to make significant RD&E investments in the future. At any point in time, we have numerous research and development projects underway. Although we target our RD&E spending to be between 10% and 15% of total revenue, this percentage is impacted by revenue levels and investing cycles.
Manufacturing and Order Fulfillment
Cognex’s products are manufactured utilizing a turnkey operation whereby the majority of component procurement, system assembly, and initial testing are performed by third-party contract manufacturers. Cognex’s primary contract manufacturer is located in Indonesia. The contract manufacturers use specified components sourced from a vendor list approved by Cognex and assembly/test documentation created and controlled by Cognex. Certain components are presently sourced from a single vendor that is selected based on price and performance considerations. In the event of a supply disruption from a single-source vendor, these components may be purchased from an alternative vendor.
After the completion of initial testing, a fully assembled product from the contract manufacturers is routed to our facility in Cork, Ireland or Natick, Massachusetts, USA, where trained Cognex personnel load the software onto the product and perform quality control procedures. Finished product for customers in the Americas is then shipped from our Natick, Massachusetts facility, while finished product for customers outside of the Americas is shipped from our Cork, Ireland facility.
Sales Channels and Support Services
Cognex sells its products through a worldwide direct sales force that focuses on the development of strategic accounts that generate or are expected to generate significant sales volume, as well as through a global network of integration and distribution partners. Our integration partners are experts in vision and complementary technologies that can provide turnkey solutions for complex automation projects using vision, and our distribution partners provide sales and local support to help Cognex reach the many prospects for our products in factories around the world.
As of December 31, 2015, Cognex’s sales force consisted of 491 professionals, and our partner network consisted of approximately 488 active integrators and authorized distributors. Sales engineers call directly on targeted accounts, with the assistance of application engineers, and manage the activities of our partners within their territories in order to implement the most advantageous sales model for our products. Cognex has sales and support personnel located throughout the Americas, Europe, and Asia. In recent years, we have expanded our sales force in emerging markets, such as China, India, Brazil, and Eastern Europe, where we believe many manufacturers can benefit from incorporating machine vision into their production processes. In 2010, we established a Wholly Foreign Owned Enterprise (WFOE) in Shanghai, China, and we began to sell to our Chinese customers through this new entity in 2011. The WFOE is able to accept payment from Chinese customers in Yuan, also known as Renminbi, which we believe allows us to reach more of the potential market for machine vision throughout Mainland China.
Sales to customers based outside of the United States represented approximately 73% of total revenue in 2015 compared to approximately 72% of total revenue in 2014. In 2015, approximately 44% of our total revenue came from customers based in Europe, 12% from customers based in Greater China, 6% from customers based in Japan, and

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11% from customers based in other regions outside the United States. Sales to customers based in Europe are denominated in Euros and U.S. Dollars, sales to customers based in Greater China are denominated in Yuan for sales within Mainland China and U.S. Dollars in other territories, sales to customers based in Japan are predominantly denominated in Yen, and sales to customers based in other regions are denominated in U.S. Dollars. Financial information about geographic areas may be found in Note 18 to the Consolidated Financial Statements, appearing in Part II - Item 8 of this Annual Report on Form 10-K.
Cognex’s service offerings include maintenance and support, consulting, and training services. Maintenance and support programs include hardware support programs that entitle customers to have failed products repaired, as well as software support programs that provide customers with application support and software updates on the latest software releases. Application support is provided by technical support personnel located at Cognex regional offices, as well as by field service engineers that provide support at the customer’s production site. We provide consulting services that range from a specific area of functionality to a completely integrated vision application or installed ID application. Training services include a variety of product courses that are available at our offices worldwide, at customer facilities, and on computer-based tutorials, video, and the internet.
Intellectual Property
We rely on the technical expertise, creativity, and knowledge of our personnel, and therefore, we utilize patent, trademark, copyright, and trade secret protection to maintain our competitive position and protect our proprietary rights in our products and technology. While our intellectual property rights are important to our success, we believe that our business as a whole is not materially dependent on any particular patent, trademark, copyright, or other intellectual property right.
As of December 31, 2015, Cognex had been granted, or owned by assignment, 437 patents issued worldwide and had another 358 patent applications pending worldwide. Cognex has used, registered, or applied to register a number of trademark registrations in the United States and in other countries. Cognex’s trademark and servicemark portfolio includes various registered marks, including, among others, Cognex®, VisionPro®, In-Sight®, Checker®, and DataMan®, as well as many common-law marks.
Compliance with Environmental Provisions
Cognex’s capital expenditures, earnings, and competitive position are not materially affected by compliance with federal, state, and local environmental provisions which have been enacted or adopted to regulate the distribution of materials into the environment.
Competition
The machine vision market is fragmented and our competitors are typically other vendors of machine vision systems, controllers, and components; manufacturers of image processing systems, sensors, and components; and system integrators. In addition, in the semiconductor and electronics capital equipment market, and with respect to machine builders in the factory automation market, we compete with the internal engineering departments of current or prospective customers. In the identification and logistics market, we compete with manufacturers of automatic identification systems. Any of these competitors may have greater financial and other resources than Cognex. Although we consider Cognex to be one of the leading machine vision companies in the world, reliable estimates of the machine vision market and the number of competitors are not available.
Cognex’s ability to compete depends upon our ability to design, manufacture, and sell high-quality products, as well as our ability to develop new products and functionality that meet evolving customer requirements. The primary competitive factors affecting the choice of a machine vision or ID system include vendor reputation, product functionality and performance, ease of use, price, and post-sales support. The importance of each of these factors varies depending upon the specific customer’s needs.
Backlog
As of December 31, 2015, backlog, which includes deferred revenue, totaled $27,020,000, compared to $36,036,000 as of December 31, 2014. Backlog reflects customer purchase orders for products scheduled for shipment primarily within 60 days. The level of backlog at any particular date is not necessarily indicative of future revenue. Delivery schedules may be extended and orders may be canceled at any time subject to certain cancellation penalties.
Employees
As of December 31, 2015, Cognex employed 1,305 persons, including 658 in sales, marketing, and service activities; 352 in research, development, and engineering; 128 in manufacturing and quality assurance; and 167 in information technology, finance, and administration. Of our 1,305 employees, 728 are based outside of the United States. None

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of our employees are represented by a labor union and we have experienced no work stoppages. We believe that our employee relations are good.
Available Information
Cognex maintains a website on the World Wide Web at www.cognex.com. We make available, free of charge, on our website in the “Company” section under the caption “Investor Information” followed by “Financial Information” and then “SEC FiIings,” our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, including exhibits, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Cognex’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov. Information contained on our website is not a part of, or incorporated by reference into, this Annual Report on Form 10-K.
ITEM 1A: RISK FACTORS
The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect our company in the future. If any of these risks were to occur, our business, financial condition, or results of operations could be materially and adversely affected. This section includes or refers to certain forward-looking statements. We refer you to the explanation of the qualifications and limitations on such forward-looking statements, appearing under the heading "Forward-Looking Statements" in Part II - Item 7 of this Annual Report on Form 10-K.
The loss of a large customer could have an adverse effect on our business.
Revenue from a single customer accounted for 18% of total revenue in 2015 and 16% of total revenue in 2014. Customers of this size may divert management’s attention from other operational matters and pull resources from other areas of the business, resulting in potential loss of revenue from other customers. In addition, customers of this size may receive volume pricing discounts and a higher level of post-sale support, which may lower our gross margin percentage. Furthermore, we have extended credit terms to this customer, resulting in large expenditures for inventory months in advance of cash collection, as well as large accounts receivable balances denominated in U.S. Dollars on our Irish subsidiary’s Euro-denominated books that exposes us to foreign currency gains or losses while these receivables are outstanding. In certain instances due to long supplier lead times, we have purchased inventory in advance of receipt of a customer purchase order, and this has exposed us to an increased risk of excess or obsolete inventory and resulting charges.
In 2013, no customer accounted for greater than 10% of total revenue. As a large portion of our sales are through resellers however, there may be end customers of our resellers that are large consumers of our products. Furthermore, there may be industry leaders that are able to exert purchasing power over their vendors' supply chains, particularly in the automotive and consumer electronics industries. Our expansion within the factory automation marketplace has reduced our reliance upon the revenue from any one customer. Nevertheless, the loss of, or significant curtailment of purchases by, any one or more of our larger customers could have a material adverse effect on our operating results.
Global economic conditions may negatively impact our operating results.
Our revenue levels are impacted by global economic conditions, as we have a significant business presence in many countries throughout the world. In 2009, the credit market crisis and slowing global economies resulted in significantly lower demand for our products, as many of our customers experienced deterioration in their businesses, cash flow issues, difficulty obtaining financing, and declining business confidence. Although our business has recovered since that time, economic conditions are still unsettled in certain regions, resulting in a challenging environment to achieve our targeted rate of revenue growth. If global economic conditions remain unsettled or were to deteriorate, our revenue and our ability to generate operating profits could be materially adversely affected.

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As a result of global economic conditions, our business is subject to the following risks, among others:
our customers may not have sufficient cash flow or access to financing to purchase our products,
our customers may not pay us within agreed upon terms or may default on their payments altogether,
our vendors may be unable to fulfill their delivery obligations to us in a timely manner,
lower demand for our products may result in charges for excess and obsolete inventory if we are unable to sell inventory that is either already on hand or committed to purchase,
lower cash flows may result in impairment charges for acquired intangible assets or goodwill,
a decline in our stock price may make stock options a less attractive form of compensation and a less effective form of retention for our employees, and
the trading price of our common stock may be volatile.
As of December 31, 2015, the Company had $622 million in cash and investments. In addition, Cognex has no long-term debt and we do not anticipate needing debt financing in the near future. We believe that our strong cash position puts us in a relatively good position to weather another economic downturn. Nevertheless, our operating results have been materially adversely affected in the past, and could be materially adversely affected in the future, as a result of unfavorable economic conditions and reduced capital spending by manufacturers worldwide.
A downturn in the consumer electronics or automotive industries may adversely affect our business.
In 2015, the largest industries that we served in the factory automation market were the consumer electronics and automotive industries. Our business is impacted by the level of capital spending in these industries, as well as the product design cycles of our major customers in these industries. The market leaders in these industries are able to exert purchasing power over their vendors' supply chains, and our large customers in these industries may decide to purchase fewer products from Cognex or stop purchasing from Cognex altogether. As a result, our operating results could be materially and adversely affected by declining sales in these industries.
Our inability to penetrate new markets may impede our revenue growth.
We are pursuing applications in the automatic identification market outside of the manufacturing sector, such as using ID products in logistics automation for package sorting and distribution. As shipping volumes grow, more distribution centers are choosing to upgrade their traditional laser-based scanners to image-based barcode readers, which will cost-effectively increase package sorter efficiency and throughput by improving read rates. Cognex has introduced image-based barcode readers in order to penetrate the ID logistics market and grow our ID Products business beyond the traditional manufacturing sector that we currently serve. Our growth plan is dependent upon successfully penetrating the ID logistics market and we are making significant investments in this area. Therefore, our failure to generate revenue in this new market in the amounts or within the time periods anticipated may have a material adverse impact on our revenue growth and operating results.
Economic, political, and other risks associated with international sales and operations could adversely affect our business and operating results.
In 2015, approximately 73% of our revenue was derived from customers located outside of the United States. We anticipate that international sales will continue to account for a significant portion of our revenue. In addition, certain of our products are assembled by third-party contract manufacturers, primarily located in Indonesia. We intend to continue to expand our sales and operations outside of the United States and expand our presence in international emerging markets, such as our expansion into China, India, Brazil, and Eastern Europe. In 2010, we established a Wholly Foreign Owned Enterprise (WFOE) in Shanghai, China and we began to sell to our Chinese customers through this new entity in 2011. This new entity has required and will continue to require significant management attention and financial resources. As a result, our business is subject to the risks inherent in international sales and operations, including, among other things:
various regulatory and statutory requirements,
difficulties in injecting and repatriating cash,
export and import restrictions,
transportation delays,
employment regulations and local labor conditions,
difficulties in staffing and managing foreign sales operations,

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instability in economic or political conditions,
difficulties protecting intellectual property,
business systems connectivity issues, and
potentially adverse tax consequences.
Any of these factors could have a material adverse effect on our operating results.
Fluctuations in foreign currency exchange rates and the use of derivative instruments to hedge these exposures could adversely affect our reported results, liquidity, and competitive position.
We face exposure to foreign currency exchange rate fluctuations, as a significant portion of our revenues, expenses, assets, and liabilities are denominated in currencies other than the functional currencies of our subsidiaries or the reporting currency of our company, which is the U.S. Dollar. In certain instances, we utilize forward contracts to hedge against foreign currency fluctuations. These contracts are used to minimize foreign currency gains or losses, as the gains or losses on the derivative are intended to offset the losses or gains on the underlying exposure. We do not engage in foreign currency speculation. If the counterparty to any of our hedging arrangements experiences financial difficulties, or is otherwise unable to honor the terms of the contract, we may experience material losses.
In 2013, we expanded our foreign currency hedging program to include foreign currency cash flow hedges that protect our budgeted revenues and expenses against foreign currency exchange rate changes compared to our budgeted rates. These derivatives are designated for hedge accounting, and therefore, the effective portion of the forward contract's gain or loss is reported in shareholders' equity as other comprehensive income (loss) and is reclassified into current operations as the hedged transaction impacts current operations. Should these hedges fail to qualify for hedge accounting or be ineffective, the gain or loss on the forward contract would be reported in current operations immediately as opposed to when the hedged transaction impacts current operations. This may result in material foreign currency gains or losses.
The success of our foreign currency risk management program depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated foreign currency gains or losses that could have a material impact on our results of operations. Furthermore, our failure to identify new exposures and hedge them in an effective manner may result in material foreign currency gains or losses.
A significant portion of our revenues and expenses are denominated in the Euro, the Japanese Yen, and the Chinese Yuan, also known as Renminbi. Our predominant currency of sale is the U.S. Dollar in the Americas, the Euro and U.S. Dollar in Europe, the Yuan in Mainland China, the Yen in Japan, and the U.S. Dollar in other regions. We estimate that approximately 40% of our sales in 2015 were invoiced in currencies other than the U.S. Dollar, and we expect sales denominated in foreign currencies to continue to represent a significant portion of our total revenue. While we also have expenses denominated in these same foreign currencies, the impact on revenues has historically been, and is expected to continue to be, greater than the offsetting impact on expenses. Therefore, in times when the U.S. Dollar strengthens in relation to these foreign currencies, we would expect to report a net decrease in operating income. Conversely, in times when the U.S. Dollar weakens in relation to these foreign currencies, we would expect to report a net increase in operating income. Thus, changes in the relative strength of the U.S. Dollar may have a material impact on our operating results.
Information security breaches or business system disruptions may adversely affect our business.
We rely on our information technology infrastructure and management information systems to effectively run our business. We may be subject to information security breaches caused by hacking, malicious software, or acts of vandalism or terrorism. Our security measures or those of our third-party service providers may not detect or prevent such breaches. Any such compromise to our information security could result in a misappropriation of our cash or other assets, an interruption in our operations, the unauthorized publication of our confidential business or proprietary information, the unauthorized release of customer, vendor, or employee data, the violation of privacy or other laws, and the exposure to litigation, any of which could harm our business and operating results. Any disruption occurring with our management information systems may cause significant business disruption, including our ability to provide quotes, process orders, ship products, invoice customers, process payments, and otherwise run our business. Any disruption occurring with these systems may have a material adverse effect on our operating results.

8


Our business could suffer if we lose the services of, or fail to attract, key personnel.
We are highly dependent upon the management and leadership of Robert J. Shillman, our Chairman of the Board of Directors and Chief Culture Officer, and Robert J. Willett, our President and Chief Executive Officer, as well as other members of our senior management team. Although we have many experienced and qualified senior managers, the loss of key personnel could have a material adverse effect on our company. Our continued growth and success also depends upon our ability to attract and retain skilled employees and on the ability of our officers and key employees to effectively manage the growth of our business through the implementation of appropriate management information systems and internal controls.
We have historically used stock options as a key component of our employee compensation program in order to align employee interests with the interests of our shareholders, provide competitive compensation and benefits packages, and encourage employee retention. We are limited as to the number of options that we may grant under our stock option plans. Accordingly, we may find it difficult to attract, retain, and motivate employees, and any such difficulties could materially adversely affect our business.
The failure of a key supplier to deliver quality product in a timely manner or our inability to obtain components for our products could adversely affect our operating results.
A significant portion of our product is manufactured by a third-party contractor located in Indonesia. This contractor has agreed to provide Cognex with termination notification periods and last-time-buy rights, if and when that may be applicable. We rely upon this contractor to provide quality product and meet delivery schedules. We engage in extensive product quality programs and processes, including actively monitoring the performance of our third-party manufacturers; however, we may not detect all product quality issues through these programs and processes.
Certain components are presently sourced from a single vendor that is selected based on price and performance considerations. In the event of a supply disruption from a single-source vendor, these components may be purchased from an alternative vendor, which may result in manufacturing delays based on the lead time of the new vendor. Certain key electronic and mechanical components that are purchased from strategic suppliers, such as processors or imagers, are fundamental to the design of Cognex products. A disruption in the supply of these key components, such as a last-time-buy announcement, natural disaster, financial bankruptcy, or other event, may require us to purchase a significant amount of inventory at unfavorable prices resulting in lower gross margins and higher risk of carrying excess inventory.
We are subject to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act that obligates companies to inquire into the origin of conflict minerals in their supply chains. We are working with our supply chain partners to take reasonable steps to assure conflict minerals are not sourced by Cognex or our supply chain partners. These steps may include purchasing supply from alternative vendors. If we are unable to secure adequate supply from alternative vendors, we may have to redesign our products, which may lead to a delay in manufacturing and a possible loss of sales. Although we are taking certain actions to mitigate supply risk, an interruption in, termination of, or material change in the purchase terms of any key components could have a material adverse effect on our operating results.
Our failure to effectively manage product transitions or accurately forecast customer demand could result in excess or obsolete inventory and resulting charges.
Because the market for our products is characterized by rapid technological advances, we frequently introduce new products with improved ease-of-use, improved hardware performance, additional software features and functionality, or lower cost that may replace existing products. Among the risks associated with the introduction of new products are difficulty predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoid excess supply of the legacy product.
We may strategically enter into non-cancelable commitments with vendors to purchase materials for our products in advance of demand to take advantage of favorable pricing or address concerns about the availability of future supplies or long lead times. This practice may expose us to an increased risk of excess or obsolete inventory and resulting charges if actual demand is lower than anticipated. Our failure to effectively manage product transitions or accurately forecast customer demand, in terms of both volume and configuration, has led to, and may again in the future lead to, an increased risk of excess or obsolete inventory and resulting charges.

9


Our products may contain design or manufacturing defects, which could result in reduced demand, significant delays, or substantial costs.
If flaws in either the design or manufacture of our products were to occur, we could experience a rate of failure in our products that could result in significant delays in shipment and material repair or replacement costs. Our release-to-market process may not be robust enough to detect significant design flaws or software bugs. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and contract manufacturers, these actions may not be sufficient to avoid a product failure rate that results in:
substantial delays in shipment,
significant repair or replacement costs,
product liability claims or lawsuits, or
potential damage to our reputation.
Any of these results could have a material adverse effect on our operating results.
Our failure to introduce new products in a successful and timely manner could result in the loss of our market share and a decrease in our revenues and profits.
The market for our products is characterized by rapidly changing technology. Accordingly, we believe that our future success will depend upon our ability to accelerate time-to-market for new products with improved functionality, ease-of-use, performance, or price. There can be no assurance that we will be able to introduce new products in accordance with scheduled release dates or that new products will achieve market acceptance. Our ability to keep pace with the rapid rate of technological change in the high-technology marketplace could have a material adverse effect on our operating results.
Product development is often a complex, time-consuming, and costly process involving significant investment in research and development with no assurance of return on investment. Our strong balance sheet allows us to continue to make significant investments in research, development, and marketing for new products and technologies. Research is by its nature speculative and the ultimate commercial success of a product depends upon various factors, many of which are not under our control. We may not achieve significant revenue from new product investments for a number of years, if at all. Moreover, new products may not generate the operating margins that we have experienced historically.
Our failure to properly manage the distribution of our products and services could result in the loss of revenues and profits.
We utilize a direct sales force, as well as a network of integration and distribution partners, to sell our products and services. Successfully managing the interaction of our direct and indirect sales channels to reach various potential customers for our products and services is a complex process. In addition, our reliance upon indirect selling methods may reduce visibility to demand and pricing issues. Each sales channel has distinct risks and costs, and therefore, our failure to implement the most advantageous balance in the sales model for our products and services could adversely affect our revenue and profitability.
If we fail to successfully protect our intellectual property, our competitive position and operating results could suffer.
We rely on our proprietary software technology and hardware designs, as well as the technical expertise, creativity, and knowledge of our personnel to maintain our position as a leading provider of machine vision products. Software piracy and reverse engineering, specifically from companies in Russia and Asia, may result in counterfeit products that are misrepresented in the market as Cognex products. Although we use a variety of methods to protect our intellectual property, we rely most heavily on patent, trademark, copyright, and trade secret protection, as well as non-disclosure agreements with customers, suppliers, employees, and consultants. We also attempt to protect our intellectual property by restricting access to our proprietary information by a combination of technical and internal security measures. These measures, however, may not be adequate to:
protect our proprietary technology,
protect our patents from challenge, invalidation, or circumvention, or
ensure that our intellectual property will provide us with competitive advantages.
Any of these adverse circumstances could have a material adverse effect on our operating results.

10


Our Company may be subject to time-consuming and costly litigation.
From time to time, we may be subject to various claims and lawsuits by competitors, customers, or other parties arising in the ordinary course of business, including lawsuits charging patent infringement, or claims and lawsuits instituted by us to protect our intellectual property or for other reasons. We may be a party to actions that are described in the section captioned “Legal Proceedings,” appearing in Part I - Item 3 of this Annual Report on Form 10-K. These matters can be time-consuming, divert management’s attention and resources, and cause us to incur significant expenses. Furthermore, the results of any of these actions may have a material adverse effect on our operating results.
Increased competition may result in decreased demand or prices for our products and services.
The machine vision market is fragmented and Cognex’s competitors are typically other vendors of machine vision systems, controllers, and components; manufacturers of image processing systems, sensors, and components; and system integrators. Any of these competitors may have greater financial and other resources than we do. Ease-of-use and product price are significant competitive factors in the factory automation marketplace. We may not be able to compete successfully in the future and our investments in research and development, sales and marketing, and support activities may be insufficient to enable us to maintain our competitive advantage. In addition, competitive pressures could lead to price erosion that could have a material adverse effect on our gross margins and operating results. We refer you to the section captioned “Competition,” appearing in Part I - Item 1 of this Annual Report on Form 10-K for further information regarding the competition that we face.
Implementation of our acquisition strategy may not be successful, which could affect our ability to increase our revenue or profitability and result in the impairment of acquired intangible assets.
We have in the past acquired, and will in the future consider the acquisition of, businesses and technologies in the machine vision industry. Our business may be negatively impacted by risks related to those acquisitions. These risks include, among others:
the inability to find or close attractive acquisition opportunities,
the diversion of management’s attention from other operational matters,
the inability to realize expected synergies resulting from the acquisition,
the failure to retain key customers or employees, and
the impairment of acquired intangible assets resulting from lower-than-expected cash flows from the acquired assets.
Acquisitions are inherently risky and the inability to effectively manage these risks could have a material adverse effect on our operating results.
We are at risk for impairment charges with respect to our investments or for acquired intangible assets or goodwill, which could have a material adverse effect on our results of operations.
As of December 31, 2015, we had $570 million of investments, of which $569 million consisted of debt securities. These debt securities are reported at fair value, with unrealized gains and losses, net of tax, recorded in shareholders’ equity as other comprehensive income (loss) since these securities are designated as available-for-sale securities. As of December 31, 2015, our portfolio of debt securities had a net unrealized loss of $1,659,000. Included in this net loss, were gross unrealized losses totaling $1,818,000, of which $1,615,000 were in a loss position for less than twelve months and $203,000 were in a loss position for greater than twelve months. As of December 31, 2015, these unrealized losses were determined to be temporary. However, if conditions change and future unrealized losses were determined to be other-than-temporary, we would be required to record an impairment charge.
Management monitors the carrying value of its investments in debt securities compared to their fair value to determine whether an other-than-temporary impairment has occurred. In considering whether a decline in fair value is other-than-temporary, we consider many factors, both qualitative and quantitative. Management considers the type of security, the credit rating of the security, the length of time the security has been in a loss position, the size of the loss position, our ability and intent to hold the security to expected recovery of value, and other meaningful information. If a decline in fair value is determined to be other-than-temporary, an impairment charge would be recorded in current operations to reduce the carrying value of the investment to its fair value. Should the fair value of investments decline in future periods below their carrying value, management will need to determine whether this decline is other-than-temporary and future impairment charges may be required.
As of December 31, 2015, we had $81 million in acquired goodwill. The fair value of goodwill is susceptible to changes in the fair value of the reporting segment in which the goodwill resides, and therefore, a decline in our market capitalization or cash flows relative to our net book value may result in future impairment charges.

11


As of December 31, 2015, we had $6 million in acquired intangible assets, consisting primarily of acquired distribution networks and completed technologies. These assets are susceptible to changes in fair value due to a decrease in the historical or projected cash flows from the use of the asset, which may be negatively impacted by economic trends. A decline in the cash flows generated by these assets, such as the revenue we are able to generate through our distribution network, may result in future impairment charges.
If we determine that any of these investments, acquired intangible assets, or goodwill is impaired, we would be required to take a related charge to earnings that could have a material adverse effect on our results of operations.
We may have additional tax liabilities, which could adversely affect our operating results and financial condition.
We are subject to income taxes in the United States, as well as numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Although we believe our tax positions are reasonable, the final determination of tax audits and any related litigation could be materially different than that which is reflected in our financial statements and could have a material adverse effect on our income tax provision, net income, or cash flows in the period in which the determination is made.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None
ITEM 2: PROPERTIES
In 1994, Cognex purchased and renovated a 100,000 square-foot building located in Natick, Massachusetts that serves as our corporate headquarters and is occupied by employees primarily in research, development and engineering, manufacturing and quality assurance, and information technology, finance and administration functions. In 1997, Cognex completed construction of a 50,000 square-foot addition to this building.
In 1995, Cognex purchased an 83,000 square-foot office building adjacent to our corporate headquarters that is partially occupied by employees primarily in sales, marketing, and service functions. The remainder of this building is occupied by tenants who have lease agreements that expire at various dates through 2021.
In 1997, Cognex purchased a three and one-half acre parcel of land adjacent to our corporate headquarters. This land is being held for future expansion.
In 2007, Cognex purchased a 19,000 square-foot building adjacent to our corporate headquarters. A portion of this facility serves as the distribution center for customers in the Americas. The remainder of this building is occupied by a tenant who has a lease agreement that expires in 2017.
In 2014, Cognex purchased the 50,000 square foot building in Cork, Ireland where we had previously leased space for several years. This facility serves as the distribution center for customers outside of the Americas.
Cognex conducts certain of its operations in leased facilities. These lease agreements expire at various dates through 2023. Certain of these leases contain renewal options, retirement obligations, escalation clauses, rent holidays, and leasehold improvement incentives.
ITEM 3: LEGAL PROCEEDINGS
In March 2013, the Company filed a lawsuit against Microscan Systems, Inc. (“Microscan”) and Code Corporation ("Code") in the United States District Court for the Southern District of New York alleging that Microscan’s Mobile Hawk handheld imager infringes U.S. Patent 7,874,487 owned by the Company (the "'487 patent”). The lawsuit sought to prohibit Code from manufacturing the product, and Microscan from selling and distributing the product.
In August 2014, Microscan filed a lawsuit against the Company in the United States District Court for the Southern District of New York alleging that the Company’s DataMan® 8500 handheld imager infringes U.S. Patent 6,352,204 owned by Microscan (the “'204 patent”). The lawsuit sought to prohibit the Company from manufacturing, selling, and distributing the DataMan® 7500, 8500, 8600, and 9500 products.
In June 2015, the Company executed a settlement agreement with Microscan requiring a payment by the Company of $3,500,000 which settles all outstanding litigation between the parties. The settlement included a patent license agreement valued at $1,667,000 that allows the Company to continue producing current models of its handheld barcode readers, which was recorded as an asset and is being amortized to cost of revenue over the five year life of the patent. The remaining $1,833,000 of the settlement was recorded as expense. All cases were dismissed by the end of July 2015. In July 2015, the Company also executed an immaterial settlement agreement with Code. This matter is now closed.

12


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, including some pertaining to the Company’s recently divested surface inspection business, which arose prior to the transaction closing date and for which the Company retains liability pursuant to the agreement governing such divestiture. While we cannot predict the outcome of these 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 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages, and titles of Cognex’s executive officers as of December 31, 2015:
Name
 
Age
 
Title
Robert J. Shillman
 
69
 
Chairman of the Board of Directors and Chief Culture Officer
Robert J. Willett
 
48
 
President and Chief Executive Officer
Richard A. Morin
 
66
 
Executive Vice President of Finance and Administration and Chief Financial Officer
Executive officers are elected annually by the Board of Directors. There are no family relationships among the directors and executive officers of the Company.
Dr. Shillman, Mr. Willett, and Mr. Morin have been employed by Cognex for no less than the past five years.

13


PART II
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on The NASDAQ Stock Market LLC, under the symbol CGNX. As of January 31, 2016, there were approximately 735 shareholders of record of the Company’s common stock. The Company believes the number of beneficial owners of the Company’s common stock on that date was substantially greater.
The high and low sales prices of the Company’s common stock as reported by the NASDAQ Stock Market for each quarter in 2015 and 2014 were as follows:
 
First
 
Second
 
Third
 
Fourth
2015
 
 
 
 
 
 
 
High
$
50.57

 
$
52.48

 
$
48.56

 
$
38.06

Low
36.12

 
44.84

 
32.35

 
32.40

2014
 
 
 
 
 
 
 
High
$
40.14

 
$
39.67

 
$
45.80

 
$
42.49

Low
32.83

 
30.66

 
37.43

 
35.16

The Company’s Board of Directors declared and paid cash dividends of $0.07 per share in the second, third, and fourth quarters of 2015. The cash dividend in the second quarter of 2015 was the first dividend declared and paid since the fourth quarter of 2012 when the Company’s Board of Directors accelerated dividends in advance of an increase in the federal tax on dividends paid after December 31, 2012. Due to these accelerated payments, no cash dividends were declared or paid in 2014 or the first quarter of 2015. 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 flow from operations.
In August 2015, the Company’s Board of Directors authorized the repurchase of $100,000,000 of the Company’s common stock. During the third quarter of 2015, the Company repurchased 2,311,000 shares at a cost of $83,936,000 under this program. No shares were repurchased under this program during the fourth quarter of 2015. In November 2015, the Company’s Board of Directors authorized the repurchase of an additional $100,000,000 of the Company’s common stock. Purchases under this November 2015 program will commence upon completion of the August 2015 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 stock options, stock price, share availability, and cash requirements.
The following table sets forth information with respect to purchases by the Company of shares of its common stock during the fourth quarter of 2015:
 
Total Number of
Shares Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
October 5 - November 1, 2015

 

 

 
$
116,064,000

November 2 - November 29, 2015

 

 

 
116,064,000

November 30 - December 31, 2015

 

 

 
116,064,000

Total

 

 

 
$
116,064,000




14


Set forth below is a line graph comparing the annual percentage change in the cumulative total shareholder return on the Company’s common stock, based upon the market price of the Company’s common stock, with the total return on companies within the Nasdaq Composite Index and the Research Data Group, Inc. Nasdaq Lab Apparatus & Analytical, Optical, Measuring & Controlling Instrument (SIC 3820-3829 US Companies) Index (the “Nasdaq Lab Apparatus Index”). The performance graph assumes an investment of $100 in each of the Company and the two indices, and the reinvestment of any dividends. The historical information set forth below is not necessarily indicative of future performance. Data for the Nasdaq Composite Index and the Nasdaq Lab Apparatus Index was provided to the Company by Research Data Group, Inc.





*$100 invested on 12/31/2010 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
 
12/10
 
12/11
 
12/12
 
12/13
 
12/14
 
12/15
Cognex Corporation
100.00

 
123.02

 
131.80

 
273.56

 
296.13

 
243.26

NASDAQ Composite
100.00

 
100.53

 
116.92

 
166.19

 
188.78

 
199.95

NASDAQ Stocks
100.00

 
91.02

 
110.50

 
154.96

 
184.23

 
179.56

(SIC 3820-3829 U.S. Companies) Lab Apparatus & Analyt,Opt, Measuring, and Controlling Instr
 
 

15


ITEM 6:  SELECTED FINANCIAL DATA
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands, except per share amounts)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenue
$
450,557

 
$
426,449

 
$
307,651

 
$
273,696

 
$
273,673

Cost of revenue (1)
102,571

 
94,067

 
62,889

 
56,161

 
54,382

Gross margin
347,986

 
332,382

 
244,762

 
217,535

 
219,291

Research, development, and engineering expenses (1)
69,791

 
55,831

 
44,315

 
37,975

 
37,614

Selling, general, and administrative expenses (1)
156,674

 
148,699

 
123,509

 
108,670

 
105,982

Operating income
121,521

 
127,852

 
76,938

 
70,890

 
75,695

Non-operating income
5,441

 
3,904

 
1,518

 
3,223

 
1,762

Income from continuing operations before income tax expense
126,962

 
131,756

 
78,456

 
74,113

 
77,457

Income tax expense on continuing operations
19,298

 
20,915

 
11,273

 
14,386

 
14,002

Net income from continuing operations
107,664

 
110,841

 
67,183

 
59,727

 
63,455

Net income from discontinued operations (1)
79,410

 
10,644

 
6,390

 
8,371

 
6,414

Net income
$
187,074

 
$
121,485

 
$
73,573

 
$
68,098

 
$
69,869

 
 
 
 
 
 
 
 
 
 
Basic earnings per weighted-average common and common-equivalent share (2):
 
 
 
 
 
 
 
 
 
Net income from continuing operations
$
1.25

 
$
1.28

 
$
0.77

 
$
0.70

 
$
0.76

Net income from discontinued operations
$
0.92

 
$
0.12

 
$
0.08

 
$
0.09

 
$
0.07

Net income
$
2.17

 
$
1.40

 
$
0.85

 
$
0.79

 
$
0.83

 
 
 
 
 
 
 
 
 
 
Diluted earnings per weighted-average common and common-equivalent share (2):
 
 
 
 
 
 
 
 
 
Net income from continuing operations
$
1.22

 
$
1.24

 
$
0.76

 
$
0.68

 
$
0.74

Net income from discontinued operations
$
0.91

 
$
0.12

 
$
0.07

 
$
0.10

 
$
0.08

Net income
$
2.13

 
$
1.36

 
$
0.83

 
$
0.78

 
$
0.82

 
 
 
 
 
 
 
 
 
 
Weighted-average common and common-equivalent shares outstanding (2):
 
 
 
 
 
 
 
 
 
Basic
86,296

 
86,858

 
86,946

 
85,666

 
83,718

Diluted
87,991

 
89,071

 
88,901

 
87,280

 
85,524

Cash dividends per common share (2)
$
0.21

 
$

 
$

 
$
0.77

 
$
0.18

 
 
 
 
 
 
 
 
 
 
(1) Amounts include stock-based compensation expense, as follows:
 
 
 
 
 
 
 
 
 
Cost of revenue
$
1,515

 
$
1,116

 
$
820

 
$
637

 
$
503

Research, development, and engineering
5,194

 
3,709

 
2,502

 
2,107

 
2,202

Selling, general, and administrative
13,032

 
9,234

 
6,461

 
5,216

 
4,722

Discontinued operations
1,533

 
1,099

 
837

 
560

 
641

Total stock-based compensation expense
$
21,274

 
$
15,158

 
$
10,620

 
$
8,520

 
$
8,068

 
 
 
 
 
 
 
 
 
 
(2) Prior period results have been adjusted to reflect the two-for-one stock split effected in the form of a stock dividend which occurred in 2013.
 
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital
$
397,591

 
$
191,237

 
$
278,160

 
$
197,130

 
$
238,061

Total assets
887,756

 
821,734

 
709,699

 
627,605

 
611,881

Shareholders’ equity
825,667

 
736,437

 
643,912

 
572,285

 
552,980


16


ITEM 7:  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, expected areas of growth, emerging markets, future product mix, research and development activities, investments, 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) the loss of a large customer; (2) current and future conditions in the global economy; (3) the reliance on revenue from the consumer electronics or automotive industries; (4) the inability to penetrate new markets; (5) the inability to achieve significant international revenue; (6) fluctuations in foreign currency exchange rates and the use of derivative instruments; (7) information security breaches or business system disruptions; (8) the inability to attract and retain skilled employees; (9) the reliance upon key suppliers to manufacture and deliver critical components for our products; (10) the failure to effectively manage product transitions or accurately forecast customer demand; (11) the inability to design and manufacture high-quality products; (12) the technological obsolescence of current products and the inability to develop new products; (13) the failure to properly manage the distribution of products and services; (14) the inability to protect our proprietary technology and intellectual property; (15) our involvement in time-consuming and costly litigation; (16) the impact of competitive pressures; (17) the challenges in integrating and achieving expected results from acquired businesses; (18) potential impairment charges with respect to our investments or for acquired intangible assets or goodwill; and (19) 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 this Annual Report on Form 10-K. 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. On July 6, 2015, the Company completed the sale of its Surface Inspection Systems Division (SISD) that specializes in machine vision products that inspect the surfaces of materials processed in a continuous fashion. The financial results of SISD are reported as a discontinued operation for all periods presented.
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.
The Company’s customers are predominantly in the factory automation market. Factory automation customers purchase Cognex 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 market includes a broad base of customers across a variety of industries, including consumer electronics, automotive, consumer products, food and beverage, medical devices, and pharmaceuticals. Factory automation customers also purchase Cognex products for use outside of the manufacturing process, such as using ID products in logistics automation for package sorting and distribution. Sales to factory automation customers represented 95% of total revenue in 2015 compared to 94% of total revenue in 2014.
A small percentage of the Company’s customers are in the semiconductor and electronics capital equipment market. These customers purchase Cognex 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 customers has been relatively flat on an annual basis for the past several years. Sales to semiconductor and electronics capital equipment manufacturers represented only 5% of total revenue in 2015 compared to 6% of total revenue in 2014.



17



Revenue for the year ended December 31, 2015 totaled $450,557,000, representing an increase of $24,108,000, or 6%, over the prior year. Changes in foreign currency exchange rates, primarily the Euro and Japanese Yen, had an unfavorable impact on revenue, as amounts denominated in foreign currencies were translated into U.S. Dollars at a lower rate. On a constant-currency basis, revenue increased approximately 11% from 2014. Gross margin was 77% of revenue in 2015 compared to 78% of revenue in 2014. This decline was largely due to the unfavorable impact of foreign currency exchange rate changes, as the gross margin percentage on a constant-currency basis was relatively flat with 2014. Operating expenses increased by $21,935,000, or 11%, from the prior year due primarily to higher personnel-related costs, stock-based compensation expense, and outsourced engineering costs, partially offset by lower expenses related to incentive compensation plans and the favorable impact of foreign currency exchange rate changes on expenses. The majority of these expense increases were RD&E investments that are anticipated to generate future revenue. These investments outpaced revenue growth, and therefore, operating income decreased by $6,331,000, or 5%, from the prior year. Operating income was $121,521,000, or 27% of revenue, in 2015 compared to $127,852,000, or 30% of revenue, in 2014; net income from continuing operations was $107,664,000, or 24% of revenue, in 2015 compared to $110,841,000, or 26% of revenue, in 2014; and net income from continuing operations per diluted share was $1.22 in 2015 compared to $1.24 in 2014.
The following table sets forth certain consolidated financial data for continuing operations as a percentage of revenue:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Revenue
100
%
 
100
%
 
100
%
Cost of revenue
23

 
22

 
20

Gross margin
77

 
78

 
80

Research, development, and engineering expenses
15

 
13

 
15

Selling, general, and administrative expenses
35

 
35

 
40

Operating income
27

 
30

 
25

Non-operating income
1

 
1

 
1

Income from continuing operations before income tax expense
28

 
31

 
26

Income tax expense on continuing operations
4

 
5

 
4

Net income from continuing operations
24
%
 
26
%
 
22
%
RESULTS OF OPERATIONS
As foreign currency exchange rates are a factor in understanding period-to-period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve investors’ ability to understand our operating results and evaluate our performance in comparison to prior periods. We also use results on a constant-currency basis as one measure to evaluate our performance.  Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We generally refer to such amounts calculated on a constant-currency basis as excluding the impact of foreign currency exchange rate changes. Results on a constant-currency basis are not in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and should be considered in addition to, and not as a substitute for, results prepared in accordance with U.S. GAAP.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenue
Revenue for the year ended December 31, 2015 increased by $24,108,000, or 6%, from the prior year. Excluding the impact of foreign currency exchange rate changes, revenue increased by $46,718,000, or 11%, as sales denominated in foreign currencies, primarily the Euro and Japanese Yen, were translated into U.S. Dollars at a lower rate. Revenue from factory automation customers increased by $48,682,000, or 12%, on a constant-currency basis due primarily to a higher volume of machine vision products sold, with the highest growth coming from Greater China and Europe. Factory automation revenue in the Americas was relatively flat. Revenue from semiconductor and electronics capital equipment manufacturers decreased by $1,964,000, or 7%, on a constant-currency basis from the prior year, with the majority of the decline coming from Japan.
Gross Margin
Gross margin as a percentage of revenue was 77% in 2015 compared to 78% in 2014. Changes in foreign currency exchange rates had a negative impact on gross margin, as a significant amount of revenue is denominated in Euros

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while inventories are predominantly purchased in U.S. Dollars. A shift in revenue mix to relatively-lower margin products and services also had a negative impact on gross margin. These gross margin decreases were partially offset by lower inventory charges in 2015 as compared to 2014.
Operating Expenses
Research, Development, and Engineering Expenses
Research, development, and engineering (RD&E) expenses in 2015 increased by $13,960,000, or 25%, from the prior year as detailed in the table below (in thousands).
RD&E expenses in 2014
$
55,831

Outsourced engineering costs
6,952

Personnel-related costs
6,559

Stock-based compensation expense
1,579

Foreign currency exchange rate changes
(2,226
)
Other
1,096

RD&E expenses in 2015
$
69,791

RD&E expenses increased due to higher personnel-related costs resulting from headcount additions, such as salaries and fringe benefits, as well as modest salary increases granted early in 2015. The Company also incurred higher spending on outsourced engineering costs, primarily related to the development of engineering prototypes for anticipated customer orders. In addition, stock-based compensation expense increased due to a higher valuation of stock options granted early in 2015. Offsetting these increases was the favorable impact on expenses of changes in foreign currency exchange rates, which resulted in lower U.S. Dollar expenses when expenses denominated in foreign currencies, primarily the Euro, were translated into U.S. Dollars.
RD&E expenses as a percentage of revenue were 15% in 2015 compared to 13% in 2014. 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. Therefore, we expect to continue to make significant RD&E investments in the future, and we target our RD&E spending to be between 10% and 15% of revenue. This percentage is impacted by revenue levels and investing cycles.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses in 2015 increased by $7,975,000, or 5%, from the prior year as detailed in the table below (in thousands).
SG&A expenses in 2014
$
148,699

Personnel-related costs
15,420

Stock-based compensation expense
4,082

Microscan settlement and legal fees
2,405

Incentive compensation plans
(6,226
)
Foreign currency exchange rate changes
(7,896
)
Other
190

SG&A expenses in 2015
$
156,674

SG&A expenses increased due to higher personnel-related costs resulting from headcount additions, such as salaries, fringe benefits, sales commissions, and travel expenses, as well as modest salary increases granted early in 2015. In addition, stock-based compensation expense increased due to a higher valuation of stock options granted early in 2015. Offsetting these increases were lower expenses related to incentive compensation plans, such as company bonuses and sales commissions, resulting from lower achievement levels on plans that were set at the beginning of the year. In addition, changes in foreign currency exchange rates resulted in lower U.S. Dollar expenses when expenses denominated in foreign currencies, primarily the Euro, were translated into U.S. Dollars.
In the second quarter of 2015, the Company reached a settlement of outstanding patent litigation with Microscan Systems, Inc. for $3,500,000. The settlement included a patent license agreement valued at $1,667,000 that allows the Company to continue producing current models of its handheld barcode readers, which was recorded as an asset and is being amortized to cost of revenue over the five year life of the patent starting in the third quarter of 2015. The

19


remaining $1,833,000 of the settlement was recorded as SG&A expense in the second quarter of 2015. Legal fees related to this litigation were $572,000 higher in 2015 than the prior year.
Non-operating Income (Expense)
The Company recorded foreign currency gains of $1,122,000 in 2015 and $1,031,000 in 2014. The foreign currency gains and losses in each period resulted primarily from the revaluation and settlement of accounts receivable, accounts payable, and intercompany balances that are reported in one currency and collected in another.
Investment income increased by $518,000, or 16%, from the prior year due to increased funds available for investment.
The Company recorded other income of $645,000 in 2015 compared to other expense of $283,000 in 2014. Other income in 2015 includes a $790,000 benefit resulting from a decrease in the fair value of the contingent consideration liability that arose from a business acquisition completed earlier in 2015 (refer to Note 20 to the Consolidated Financial Statements in Part II - Item 8 of this Annual Report on Form 10-K). Other income (expense) also includes rental income, net of associated expenses, from leasing space in buildings adjacent to the Company’s corporate headquarters.
Income Tax Expense
The Company’s effective tax rate was 15% of the Company’s pre-tax income in 2015 compared to 16% in 2014.
The effective tax rate for 2015 included the impact of the following discrete tax events: (1) a decrease in tax expense of $1,105,000 from the final true-up of the prior year’s tax accrual upon filing the actual tax returns, (2) a decrease in tax expense of $975,000 from the expiration of statutes of limitations for certain reserves for income tax uncertainties, (3) a decrease in tax expense, net of reserves, of $910,000 from the retroactive application of the 2015 research and development tax credit passed by Congress in December 2015 and applied retroactively to January 1, 2015, and (4) an increase in tax expense of $65,000 from the write down of a deferred tax asset.
The effective tax rate for 2014 included the impact of the following discrete tax events: (1) a decrease in tax expense of $652,000 from the final true-up on the prior year’s tax accrual upon filing the actual tax returns, (2) a decrease in tax expense, net of reserves, of $645,000 from the retroactive application of the 2014 research and development tax credit passed by Congress in December 2014 and applied retroactively to January 1, 2014, (3) a decrease in tax expense of $418,000 from the closing of the Internal Revenue Service audit of the Company for tax years 2010 and 2011, and (4) a decrease in tax expense of $217,000 from the expiration of the statutes of limitations for certain reserves for income tax uncertainties.
Excluding the impact of these discrete tax events, the Company’s effective tax rate was relatively consistent for 2015 and 2014 at approximately 17.5%.
Discontinued Operations
On July 6, 2015, the Company completed the sale of its Surface Inspection Systems Division (SISD) that specializes in machine vision products that inspect the surfaces of materials processed in a continuous fashion. The financial results of SISD are reported as a discontinued operation for all periods presented. Income from discontinued operations, net of tax, was $1,228,000 for the six-month period ended July 5, 2015 and was $10,644,000 for the year ended December 31, 2014. The gain on the sale of SISD, net of tax, recorded in 2015 was $78,182,000. Refer to Note 19 to the Consolidated Financial Statements in Part I - Item 1 of this Quarterly Report on Form 10-Q for further information.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenue
Revenue for the year ended December 31, 2014 increased by $118,798,000, or 39%, from the prior year. Sales to factory automation customers increased by $115,519,000, or 41% and sales to semiconductor and electronics capital equipment customers increased by $3,279,000, or 14%.
Sales to customers in the factory automation market represented 94% of total revenue in 2014 compared to 93% of total revenue in 2013. Sales to these customers increased by $115,519,000, or 41%, from the prior year. Foreign currency exchange rate changes did not have a material impact on total factory automation revenue, as the impact of a stronger Euro in 2014 compared to the prior year was offset by the impact of a weaker Japanese Yen. Although the Euro was stronger, on average, for the full year 2014 compared to the full year 2013, the Euro weakened vs. the U.S. Dollar in the fourth quarter of 2014. A weaker Euro and Japanese Yen vs. the U.S. Dollar results in lower reported U.S. Dollar revenue when the Company’s sales denominated in these currencies are translated into U.S. Dollars.
The Company recorded factory automation revenue from a single customer, both direct and indirect, of approximately $70,000,000 in 2014 compared to approximately $10,000,000 in 2013. Excluding revenue from this customer in both

20


years, factory automation revenue increased by $55,519,000, or 20%, from the prior year. Geographically, this incremental revenue came primarily from the Americas, Greater China, and Europe.
Sales to customers who make automation equipment for the semiconductor and electronics industries represented 6% of total revenue in 2014 compared to 7% of total revenue in 2013. Sales to these customers increased by $3,279,000, or 14%, from the prior year. Excluding the impact of foreign currency exchange rate changes, which primarily related to the Japanese Yen, sales to semiconductor and electronics capital equipment customers increased by approximately $4,051,000, or 18%, from 2013.
Gross Margin
Gross margin as a percentage of revenue was 78% in 2014 compared to 80% in 2013 due to lower product and service margins, as well as a greater percentage of revenue from the sale of services, which have lower margins than the sale of products. The lower product margin was due to a relatively lower product margin on the single-customer revenue arrangement noted in “Revenue,” as well as higher new product introduction costs and higher inventory charges recorded in 2014 than in the prior year. These product margin decreases were partially offset by the favorable impact of material cost reductions and volume purchasing, as well as manufacturing efficiencies achieved from higher revenue levels as fixed manufacturing costs were spread over a larger revenue base. The lower service margin was due to the on-site support services provided as part of the single-customer revenue arrangement noted in “Revenue.” These services were provided at a relatively lower service margin than the Company’s other service offerings.
Operating Expenses
Research, Development, and Engineering Expenses
Research, development, and engineering (RD&E) expenses in 2014 increased by $11,516,000, or 26%, from the prior year as detailed in the table below (in thousands).
RD&E expenses in 2013
$
44,315

Personnel-related costs (recurring nature)
3,256

Recruiting and other non-recurring personnel-related costs
1,420

Engineering prototypes
1,283

Company bonus and other employee incentive programs
1,206

Stock-based compensation expense
1,205

Travel costs
716

Outsourced engineering costs
443

Other
1,987

RD&E expenses in 2014
$
55,831

The increase in RD&E expenses was due to higher personnel-related costs, such as salaries and fringe benefits, resulting from headcount additions and modest salary increases granted early in 2014. Headcount was added to support the significantly higher level of business in 2014. Recruiting and other non-recurring personnel-related costs, as well as travel costs, also increased as a result of the additional headcount and higher business level. Company bonus expense increased due to the additional headcount and the Company incurred higher expenses related to other employee incentive programs, including a $1,000 bonus given to every full-time employee in celebration of the Company’s one-millionth shipment. In addition, the Company incurred higher spending on materials for engineering prototypes, as well as higher outsourced engineering costs in 2014. Stock-based compensation expense increased due to a higher valuation of stock options granted early in 2014.
Selling, General, and Administrative Expenses
Selling, general, and administrative (SG&A) expenses in 2014 increased by $25,190,000, or 20%, from the prior year as detailed in the table below (in thousands).

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SG&A expenses in 2013
$
123,509

Personnel-related costs (recurring nature)
11,535

Stock-based compensation expense
2,754

Sales commissions
2,307

Sales demonstration equipment
1,936

Company bonus and other employee incentive programs
1,773

Marketing activities
1,463

Legal fees
1,156

Recruiting and other non-recurring personnel-related costs
751

Other
1,515

SG&A expenses in 2014
$
148,699

The increase in SG&A expenses was due to headcount additions, resulting in higher personnel-related costs, such as salaries, fringe benefits, sales commissions, and travel expenses, as well as modest salary increases granted early in 2014. Headcount was added to support the significantly higher level of business in 2014. Stock-based compensation expense increased due to a higher valuation of stock options granted early in 2014. Sales commissions also increased as a result of the higher business level, as did marketing activities. Company bonus expense increased due to the additional headcount and the Company incurred higher expenses related to other employee incentive programs, including a $1,000 bonus given to every full-time employee in celebration of the Company’s one-millionth shipment. Legal fees increased due to patent-infringement actions. Recruiting and other non-recurring personnel-related costs, as well as sales demonstration equipment, also increased as a result of the additional headcount and higher business level.
Non-operating Income (Expense)
The Company recorded foreign currency gains of $1,031,000 in 2014 compared to foreign currency losses of $646,000 in 2013. The foreign currency gains and losses in each period resulted primarily from the revaluation and settlement of accounts receivable, accounts payable, and intercompany balances that are reported in one currency and collected in another.
Investment income increased by $552,000, or 21%, from the prior year. This increase was primarily due to investment losses of $702,000 that were recorded in 2013. Excluding these losses, investment income decreased due to lower returns, partially offset by a higher investment balance.
The Company recorded other expense, net of other income, of $283,000 in 2014 and $440,000 in 2013. The Company recorded $354,000 of other income in 2013 due to the expiration of the statutes of limitations relating to tax holidays, during which time the Company collected value-added taxes from customers that were not required to be remitted to the government authority. Other income (expense) also includes rental income, net of associated expenses, from leasing space in buildings adjacent to the Company’s corporate headquarters. These buildings were largely unoccupied during 2013; however, late in 2013, a new tenant began to occupy a significant portion of the space in one of the buildings, which resulted in higher rental income in 2014.
Income Tax Expense
The Company’s effective tax rate was 16% of the Company’s pre-tax income in 2014 compared to 14% in 2013.
The effective tax rate for 2014 included the impact of the following discrete tax events: (1) a decrease in tax expense of $652,000 from the final true-up on the prior year’s tax accrual upon filing the actual tax returns, (2) a decrease in tax expense, net of reserves, of $645,000 from the retroactive application of the 2014 research and development tax credit passed by Congress in December 2014 and applied retroactively to January 1, 2014, (3) a decrease in tax expense of $418,000 from the closing of the Internal Revenue Service audit of the Company for tax years 2010 and 2011, and (4) a decrease in tax expense of $217,000 from the expiration of the statutes of limitations for certain reserves for income tax uncertainties.
The effective tax rate for 2013 included the impact of the following discrete tax events: (1) a decrease in tax expense of $1,790,000 from the expiration of statutes of limitations for certain reserves for income tax uncertainties, (2) a decrease in tax expense of $428,000 from the application of the 2012 research and development credit passed by Congress on January 1, 2013, and (3) an increase in tax expense of $267,000 from the final true-up of the prior year's tax accrual upon filing the actual tax returns.
Excluding the impact of these discrete events, the Company's effective tax rate was approximately 17.5% of the Company's pre-tax income in 2014 compared to 17% in 2013.

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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 $621,531,000 as of December 31, 2015. The Company has established guidelines relative to credit ratings, diversification, and maturities of its investments that maintain liquidity.
The Company’s cash requirements in 2015 were met with positive cash flows from operations, investment maturities, and the proceeds from stock option exercises, as well as the net proceeds received from the sale of the Company’s Surface Inspection Systems Division. Cash requirements consisted of operating activities, investment purchases, cash paid for business and technology acquisitions, the repurchase of common stock, the payment of dividends, and capital expenditures.
Capital expenditures totaled $18,228,000 in 2015 and consisted primarily of expenditures for building improvements at the Company’s headquarters and adjacent buildings in Natick, Massachusetts, as well as computer hardware, computer software, and manufacturing test equipment related to new product introductions.
On July 6, 2015, the Company completed the sale of its Surface Inspection Systems Division that specializes in machine vision products that inspect the surfaces of materials processed in a continuous fashion. The Company received net proceeds of $104,388,000 from this sale, representing the sale price less associated income taxes and transaction costs.
The following table summarizes the Company’s material contractual obligations, both fixed and contingent (in thousands):
Year Ended December 31,
Venrock
Limited
Partnership
Interest
 
Inventory
Purchase
Commitments
 
Leases
 
Total
2016
$
614

 
$
543

 
$
4,110

 
$
5,267

2017

 

 
2,739

 
2,739

2018

 

 
2,197

 
2,197

2019

 

 
1,571

 
1,571

2020

 

 
1,308

 
1,308

Thereafter

 

 
2,453

 
2,453

 
$
614

 
$
543

 
$
14,378

 
$
15,535


The Company is 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. During the fourth quarter of 2015, an amendment to the partnership agreement extended the commitment period by two years to December 31, 2017. The Company does not have the right to withdraw from the partnership prior to this date. As of December 31, 2015, 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, 2017. Contributions and distributions are at the discretion of Venrock’s management. The Company received a cash distribution of $1,014,000 in 2015, which was accounted for as a return of capital.
In addition to the obligations described above, the following items may also result in future material uses of cash:
Dividends
The Company’s Board of Directors declared and paid cash dividends of $0.07 per share in the second, third, and fourth quarters of 2015. Total cash dividends paid in 2015 amounted to $18,062,000. The cash dividend in the second quarter of 2015 was the first dividend declared and paid since the fourth quarter of 2012 when the Company’s Board of Directors accelerated dividends in advance of an increase in the federal tax on dividends paid after December 31, 2012. Due to these accelerated payments, no cash dividends were declared or paid in 2013, 2014, or the first quarter of 2015. 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 flow from operations.

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Stock Repurchases
In April 2014, the Company's Board of Directors authorized the repurchase of $50,000,000 of the Company's common stock. As of December 31, 2015, the Company repurchased 1,079,000 shares at a cost of $50,000,000 under this program, including 895,000 shares at a cost of $42,415,000 in 2015. Stock repurchases under this 2014 program are now complete. In August 2015, the Company’s Board of Directors authorized the repurchase of an additional $100,000,000 of the Company’s common stock. Purchases under this August 2015 program began in the third quarter of 2015 upon completion of the 2014 program. As of December 31, 2015, the Company repurchased 2,311,000 shares at a cost of $83,936,000 under this program. Total stock repurchases in 2015 amounted to $126,351,000. In November 2015, the Company’s Board of Directors authorized the repurchase of an additional $100,000,000 of the Company’s common stock. Purchases under this November 2015 program will commence upon completion of the August 2015 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 stock options, stock price, share availability, and cash requirements.
Acquisitions
The Company’s business strategy includes selective expansion into new machine vision markets and applications through the acquisition of businesses and technologies, which may result in significant cash outlays in the future.
On August 21, 2015, the Company acquired selected assets of Manatee Works, Inc., a privately-held U.S.-based developer of barcode scanning software development kits (SDKs). Cognex paid $1,023,000 in cash upon closing and may pay additional contingent cash consideration of up to $5,000,000 over the next three years based upon certain milestone revenue levels. In the second quarter of 2015, the Company paid $10,475,000 in cash to purchase technology that was subsequently transferred as part of the sale of the Surface Inspections Systems Division.
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 December 31, 2015, the Company had $621,531,000 in cash and investments. 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.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2015, the Company has no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or circumstances resulting in charges that could be material in future reporting periods. We believe the following critical accounting policies require the use of significant estimates and judgments in the preparation of our consolidated financial statements.
Revenue Recognition
The Company’s product revenue is derived from the sale of machine vision systems, which can take the form of hardware with embedded software or software-only, and related accessories. The Company also generates revenue by providing maintenance and support, consulting, and training services to its customers. Certain of the Company’s arrangements include multiple deliverables that provide the customer with a combination of products or services. In order to recognize revenue, the Company requires that a signed customer contract or purchase order is received, the fee from the arrangement is fixed or determinable, and collection of the resulting receivable is probable. Assuming that these criteria have been met, product revenue is generally recognized upon delivery, revenue from maintenance and support programs is recognized ratably over the program period, and revenue from consulting and training services is recognized when the services have been provided. When customer-specified acceptance criteria exist that are substantive, product revenue is deferred until these criteria have been met, along with the associated incremental direct costs.

24


The majority of the Company’s product offerings consist of hardware with embedded software. Under the revenue recognition rules for tangible products, the fee from a multiple-deliverable arrangement is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-price hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. A delivered item that does not qualify as a separate unit of accounting is combined with the other undelivered items in the arrangement and revenue is recognized for those combined deliverables as a single unit of accounting. The selling price used for each deliverable is based upon vendor-specific objective evidence (VSOE) if available, third-party evidence (TPE) if VSOE is not available, and management’s best estimate of selling price (BESP) if neither VSOE nor TPE are available. VSOE is the price charged for a deliverable when it is sold separately. TPE is the price of the Company’s or any competitor’s largely interchangeable products or services in stand-alone sales to similarly-situated customers. BESP is the price at which the Company would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions and entity-specific factors.
Management exercises judgment in connection with the determination of the amount of revenue to be recognized each period. Such judgments include, but are not limited to, determining whether separate contracts with the same customer that are entered into at or near the same time should be accounted for as a single arrangement, identifying the various elements in an arrangement, determining if delivered items have stand-alone value, determining the relative selling prices of the arrangement’s deliverables, determining whether options to buy additional products or services in the future are substantive and should be accounted for as a deliverable in the original arrangement, assessing whether the fee is fixed or determinable, determining the probability of collecting the receivable, determining whether customer-specified acceptance criteria are substantive in nature, determining whether remaining performance obligations are inconsequential or perfunctory, and assessing whether vendor-specific objective evidence of fair value has been established for undelivered elements.
Investments
As of December 31, 2015, the Company’s investment balance totaled $569,556,000, of which $568,614,000 consisted of debt securities and $942,000 consisted of a limited partnership interest in a venture capital fund. The debt securities are reported at fair value, with unrealized gains and losses, net of tax, recorded in shareholders’ equity as other comprehensive income (loss) since these securities are designated as available-for-sale securities. As of December 31, 2015,the Company’s portfolio of debt securities had a net unrealized loss of $1,659,000. The limited partnership interest is in Venrock Associates III, L.P., a venture capital fund with an investment focus on Information Technology and Health Care and Life Sciences. The limited partnership interest is accounted for using the cost method because our investment is less than 5% of the partnership and we have no influence over the partnership’s operating and financial policies. Furthermore, this investment does not have a readily determinable market value, and therefore, does not qualify for fair value accounting.
The Company applies a three-level valuation hierarchy for fair value measurements. The categorization of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. Level 1 inputs to the valuation methodology utilize unadjusted quoted market prices in active markets for identical assets and liabilities. Level 2 inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets and liabilities, quoted prices for identical and similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3 inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of the inputs that market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. Changes in the valuation methodology, interest rates, credit rates, or the market for these investments could result in changes to their fair values. Changes to the Level of an investment within the fair value hierarchy are determined at the end of the reporting period.
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’s debt securities 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. Management is responsible for estimating the fair value of these financial assets and liabilities, and in doing so, considers valuations provided by a large, third-party pricing service. This 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 daily valuations.
Management monitors the carrying value of its investments in debt securities and the limited partnership interest compared to their fair value to determine whether an other-than-temporary impairment has occurred. In considering whether a decline in fair value is other-than-temporary, we consider many factors, both qualitative and quantitative in

25


nature. In its evaluation of its debt securities, management considers the type of security, the credit rating of the security, the length of time the security has been in a loss position, the size of the loss position, our ability and intent to hold the security to expected recovery of value, and other meaningful information. If a decline in fair value is determined to be other-than-temporary, an impairment charge would be recorded in current operations to reduce the carrying value of the investment to its fair value. There were no other-than-temporary impairments of investments in 2015, 2014, or 2013.
Accounts Receivable
The Company maintains reserves against its accounts receivable for potential credit losses. Ongoing credit evaluations of customers are performed and the Company has historically not experienced significant losses related to the collection of its accounts receivable. Allowances for specific accounts determined to be at risk for collection are estimated by management taking into account the length of time the receivable has been outstanding, the customer’s current ability to pay its obligations to the Company, general economic and industry conditions, as well as various other factors. Global economic uncertainty may result in longer payment cycles and challenges in collecting accounts receivable balances, which make these estimates more judgmental. An adverse change in any of these factors could result in higher than expected customer defaults and may result in the need for additional bad debt provisions. As of December 31, 2015, the Company’s reserve against accounts receivable was $736,000, or 2% of the gross accounts receivable balance. A 10% difference in the reserve against accounts receivable as of December 31, 2015 would have affected net income by approximately $61,000.
Inventories
Inventories are stated at the lower of cost or market. Management estimates excess and obsolescence exposures based upon assumptions about future demand, product transitions, and market conditions, and records reserves to reduce the carrying value of inventories to their net realizable value. Volatility in the global economy makes these assumptions about future demand more judgmental. Among the risks associated with the introduction of new products are difficulty predicting customer demand and effectively managing inventory levels to ensure adequate supply of the new product and avoid excess supply of the legacy product. In addition, we may strategically enter into non-cancelable commitments with vendors to purchase materials for products in advance of demand to take advantage of favorable pricing or address concerns about the availability of future supplies and long lead times. As of December 31, 2015, the Company’s reserve for excess and obsolete inventory totaled $3,803,000, or 9% of the gross inventory balance. A 10% difference in inventory reserves as of December 31, 2015 would have affected net income by approximately $314,000.
Long-lived Assets
The Company has long-lived assets, including property, plant, and equipment and acquired intangible assets. These assets are susceptible to shortened estimated useful lives and changes in fair value due to changes in their use, market or economic changes, or other events or circumstances. The Company evaluates the potential impairment of these long-lived assets whenever events or circumstances indicate their carrying value may not be recoverable. Factors that could trigger an impairment review include historical or projected results that are less than the assumptions used in the original valuation of an acquired asset, a change in the Company’s business strategy or its use of an acquired asset, or negative economic or industry trends.
If an event or circumstance indicates the carrying value of long-lived assets may not be recoverable, the Company assesses the recoverability of the assets by comparing the carrying value of the assets to the sum of the undiscounted future cash flows that the assets are expected to generate over their remaining economic lives. If the carrying value exceeds the sum of the undiscounted future cash flows, the Company compares the fair value of the long-lived assets to the carrying value and records an impairment loss for the difference. The Company generally estimates the fair value of its long-lived assets using the income approach based upon a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, discount factors, income tax rates, the identification of groups of assets with highly independent cash flows, and assets’ economic lives. Volatility in the global economy makes these assumptions and estimates more judgmental. No impairment losses were recorded in 2015, 2014, or 2013. Actual future operating results and the remaining economic lives of our long-lived assets could differ from those used in assessing the recoverability of these assets and could result in an impairment of long-lived assets in future periods.

26


Goodwill
Management evaluates the potential impairment of goodwill annually each fourth quarter and whenever events or circumstances indicate their carrying value may not be recoverable. On July 6, 2015, the Company completed the sale of its Surface Inspection Systems Division (SISD). The Company had previously identified SISD, along with its Modular Vision Systems Division (MVSD), as reporting units for purposes of its goodwill impairment test. Given the disposition of SISD, management reviewed its reporting units and concluded that the Company now has one reporting unit. Determining the Company’s reporting units requires judgments regarding what constitutes a business and at what level discrete financial information is available and reviewed by management.
The Company performs a qualitative assessment of goodwill (commonly known as “step zero”) to determine whether further impairment testing is necessary. If this qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity would proceed to a two-step process. Step one compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount exceeds the fair value of the reporting unit, step two is required to measure the amount of impairment loss. Step two compares the implied fair value of the reporting unit goodwill to the carrying amount of the goodwill. The Company estimates the fair value of its reporting unit using the income approach based upon a discounted cash flow model. In addition, the Company uses the market approach, which compares the reporting unit to publicly-traded companies and transactions involving similar businesses, to support the conclusions based upon the income approach. The income approach requires the use of many assumptions and estimates including future revenues, expenses, capital expenditures, and working capital, as well as discount factors and income tax rates.
Factors that management considered in the qualitative assessment include macroeconomic conditions, industry and market considerations, overall financial performance (both current and projected), changes in management or strategy, and changes in the composition or carrying amount of net assets. In addition, management took into consideration the goodwill valuation as of October 4, 2010, which was the last time it was performed under the two-step process. At that time, this analysis indicated that the fair value of the MVSD reporting unit exceeded its carrying value by approximately 208%. Based on the qualitative assessment, management does not believe that it is more likely than not that the carrying value of its reporting unit exceeds its fair value. No impairment losses were recorded in 2015, 2014, or 2013.
Warranty Obligations
The Company records the estimated cost of fulfilling product warranties at the time of sale 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. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers and third-party contract manufacturers, the Company’s warranty obligation is affected by product failure rates, material usage, and service delivery costs incurred in correcting a product failure. An adverse change in any of these factors may result in the need for additional warranty provisions. As of December 31, 2015, the Company’s accrued warranty obligations amounted to $4,174,000. A 10% difference in accrued warranty obligations as of December 31, 2015 would have affected net income by approximately $344,000.
Contingencies
Estimated losses from contingencies are accrued by management based upon whether a loss is probable and whether management has the ability to reasonably estimate the amount of the loss. Estimating potential losses, or even a range of losses, is difficult and involves a great deal of judgment. Management relies primarily on assessments made by its internal and external legal counsel to make the determination as to whether a loss contingency arising from litigation should be recorded or disclosed. This analysis is performed on a quarterly basis or when facts and circumstances dictate. Should the resolution of a contingency result in a loss that we did not accrue because management did not believe that the loss was probable or capable of being reasonably estimated, then this loss would result in a charge to income in the period the contingency was resolved. The Company did not have any significant accrued contingencies as of December 31, 2015.
Stock-Based Compensation
Compensation expense is recognized for all stock option and restricted stock grants. Determining the appropriate valuation model and estimating the fair values of these grants requires the input of subjective assumptions, including expected stock price volatility, dividend yields, expected term, and forfeiture rates. The expected volatility assumption is based partially upon the historical volatility of the Company’s common stock, which may or may not be a true indicator of future volatility, particularly as the Company continues to seek to diversify its customer base. The assumptions used in calculating the fair values of stock option grants represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and different assumptions are

27


used, stock-based compensation expense could be significantly different from what the Company recorded in the current period.
Income Taxes
Significant judgment is required in determining worldwide income tax expense based upon tax laws in the various jurisdictions in which the Company operates. The Company has established reserves for income taxes by applying the “more likely than not” criteria, under which the recognition threshold is met when an entity concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant tax authority. All tax positions are analyzed periodically and adjustments are made as events occur that warrant modification, such as the completion of audits or the expiration of statutes of limitations, which may result in future charges or credits to income tax expense.
As part of the process of preparing consolidated financial statements, management is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process involves estimating the current tax liability, as well as assessing temporary differences arising from the different treatment of items for financial statement and tax purposes. These differences result in deferred tax assets and liabilities, which are recorded on the Consolidated Balance Sheets.
The Company has net deferred tax assets primarily resulting from temporary differences between the financial statement and tax bases of assets and liabilities. Management has evaluated the realizability of these deferred tax assets and has determined that it is more likely than not that these assets will be realized, net of any valuation allowance. In reaching this conclusion, we have evaluated relevant criteria, including the Company’s historical profitability, current projections of future profitability, and the lives of tax credits, net operating and capital losses, and other carryforwards, certain of which have indefinite lives. Should the Company fail to generate sufficient pre-tax profits in future periods, we may be required to record material adjustments to these deferred tax assets, resulting in a charge to income in the period of determination.
Derivative Instruments
In certain instances, the Company enters into forward contracts to hedge against foreign currency fluctuations. The Company's forward contracts 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 or liability, and are therefore classified as Level 2. The Company's forward contracts are typically traded or executed in over-the-counter markets with a relatively high degree of pricing transparency. The market participants are generally large commercial banks.
Currently, the Company enters into two types of hedges to manage foreign currency exchange rate risk. The first are economic hedges which utilize foreign currency forward contracts to manage the exposure to fluctuations in foreign currency exchange rates arising primarily from foreign-denominated receivables and payables. The gains and losses on these derivatives are intended to be offset by the changes in the fair value of the assets and liabilities being hedged. These economic hedges are not designated as effective hedges, and therefore, do not qualify for effective hedge accounting. The second are cash flow hedges which utilize foreign currency forward contracts to protect our budgeted revenues and expenses against foreign currency exchange rate changes compared to our budgeted rates. These cash flow hedges are designated for hedge accounting, and therefore, the effective portion of the forward contract's gain or loss is reported in shareholders' equity as other comprehensive income (loss) and is reclassified into current operations as the hedged transaction impacts current operations. Should these hedges fail to qualify for hedge accounting or be ineffective, the gain or loss on the forward contract would be reported in current operations immediately as opposed to when the hedged transaction impacts current operations. This may result in material foreign currency gains or losses.
NEW PRONOUNCEMENTS
Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers”
The amendments in ASU 2014-09 will supersede and replace all currently existing U.S. GAAP, including industry-specific revenue recognition guidance, with a single, principle-based revenue recognition framework. The concept guiding this new model is that revenue recognition will depict transfer of control to the customer in an amount that reflects consideration to which an entity expects to be entitled. The core principles supporting this framework include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. This new framework will require entities to apply significantly more judgment. This increase in management judgment will require expanded disclosure on estimation methods, inputs, and assumptions for revenue recognition. The Transition Resource Group (TRG) is evaluating the impact of this ASU and will release implementation guidance

28


in future periods. ASU 2015-14, "Deferral of the effective date" amended the effective date of ASU 2014-09 for public companies to annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but only beginning after December 15, 2016. Management will continue to evaluate the impact of this standard as it evolves.
Accounting Standards Update (ASU) 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement"
ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, then the customer should account for the arrangement as a service contract. For public companies, the guidance in ASU 2015-05 is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Early adoption is permitted. Management does not expect ASU 2015-05 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2015-11, "Inventory - Simplifying the Measurement of Inventory"
ASU 2015-11 requires companies to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which a company must measure inventory at the lower of cost or market. This ASU eliminates the need to determine replacement cost and evaluate whether said cost is within a quantitative range. This ASU also further aligns U.S. GAAP and international accounting standards. For public companies, the guidance in ASU 2015-11 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Management does not expect ASU 2015-11 to have a material impact on the Company's financial statements and disclosures.
Accounting Standards Update (ASU) 2015-16, "Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments"
ASU 2015-16 simplifies the requirements to retrospectively account for adjustments made to provisional amounts recognized in a business combination. This ASU applies to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and that have recognized an adjustment to provisional amounts during the measurement period. For public companies, the guidance in ASU 2015-16 is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. This ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date. Management does not expect ASU 2015-16 to have a material impact on the Company's financial statements and disclosures.
Accounting Standard Update (ASU) 2015-17, "Income Taxes - Balance Sheet Classification of Deferred Taxes”
ASU 2015-17 simplifies the presentation of deferred income taxes to require that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. Current U.S. GAAP requires an entity to separate deferred income tax assets and liabilities into current and non-current amounts in a classified balance sheet.The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments of this Update. For public companies, the guidance in ASC 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier adoption is permitted. Management will comply with the presentation and disclosure requirements of ASU-2017 for the year ended December 31, 2016.
ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 currently mitigates certain foreign currency exchange rate risks with derivative instruments. The Company does not currently manage its interest rate risk with derivative instruments.
Foreign Currency Risk
The Company faces exposure to foreign currency exchange rate fluctuations, as a significant portion of its revenues, expenses, assets, and liabilities are denominated in currencies other than the functional currencies of the Company’s subsidiaries or the reporting currency of the Company, which is the U.S. Dollar. In certain instances, we utilize forward contracts to hedge against foreign currency fluctuations. These contracts are used to minimize foreign gains or losses, as the gains or losses on the derivative are intended to offset the losses or gains on the underlying exposure. We do not engage in foreign currency speculation.
The Company’s foreign currency risk management strategy is principally designed to mitigate the potential financial impact of changes in the value of transactions and balances denominated in foreign currencies resulting from changes

29


in foreign currency exchange rates. Currently, the Company enters into two types of hedges to manage this risk. The first are economic hedges which utilize foreign currency forward contracts with maturities of up to 45 days to manage the exposure to fluctuations in foreign currency exchange rates arising primarily from foreign-denominated receivables and payables. The gains and losses on these derivatives are intended to be offset by the changes in the fair value of the assets and liabilities being hedged. The second are cash flow hedges which utilize foreign currency forward contracts with maturities of up to 18 months to hedge specific forecasted transactions of the Company's foreign subsidiaries with the goal of protecting our budgeted revenues and expenses against foreign currency exchange rate changes compared to our budgeted rates.
The Company had the following outstanding forward contracts (in thousands):
 
December 31, 2015
December 31, 2014
Currency
Notional Value
USD Equivalent
High Rate
Low Rate
Notional Value
USD Equivalent
High Rate
Low Rate
 
 
 
 
 
 
 
 
 
Derivatives Designated as Hedging Instruments:
 
 
 
 
 
U.S. Dollar
16,720

$
16,720

1.1462

1.0903


$



Japanese Yen
942,500

7,605

147.82

129.08

1,225,000

10,211

148.12

138.70

Hungarian Forint
547,000

1,893

319.87

301.10

803,000

3,099

319.05

305.07

Singapore Dollar
2,063

1,425

1.6451

1.5063

3,515

2,564

1.7413

1.6304

Canadian Dollar
41

37

1.1155

1.1145

758

688

1.1250

1.0620

British Pound
25

34

0.8039

0.8021

491

732

0.8375

0.7914

Derivatives Not Designated as Hedging Instruments:
 
 
Japanese Yen
700,000

$
5,800

131.07

131.07

345,000

$
2,878

145.02

145.02

British Pound
1,650

2,441

0.7342

0.7342

1,400

2,183

0.7760

0.7760

Korean Won
1,400,000

1,187

1,281

1,281

940,000

858

1,325

1,325

Singapore Dollar
1,525

1,074

1.5422

1.5422

1,225

922

1.6070

1.6070

Hungarian Forint
250,000

857

316.95

316.95

410,000

1,569

316.10

316.10

Taiwanese Dollar
26,425

800

35.85

35.85

28,000

883

38.36

38.36

A change in foreign currency exchange rates could materially impact the fair value of these contracts; however, if this occurred, the fair value of the underlying exposures hedged by the contracts would change by a similar amount. Accordingly, management does not believe that a material change in foreign currency exchange rates used in the fair value of our derivative instruments would materially impact operations or cash flows.
The success of our foreign currency risk management program depends upon forecasts of transaction activity denominated in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated foreign currency gains or losses that could have a material impact on our results of operations. Furthermore, our failure to identify new exposures and hedge them in an effective manner may result in material foreign currency gains or losses.
The Company’s functional currency/reporting currency exchange rate exposures result from revenues and expenses that are denominated in currencies other than the U.S. Dollar. A significant portion of our revenues and expenses are denominated in the Euro, the Japanese Yen, and the Chinese Yuan, also known as Renminbi. Our predominant currency of sale is the U.S. Dollar in the Americas, the Euro and U.S. Dollar in Europe, the Yuan in Mainland China, the Yen in Japan, and the U.S. Dollar in other regions. We estimate that approximately 40% of our sales in 2015 were invoiced in currencies other than the U.S. Dollar, and we expect sales denominated in foreign currencies to continue to represent a significant portion of our total revenue. While we also have expenses denominated in these same foreign currencies, the impact on revenues has historically been, and is expected to continue to be, greater than the offsetting impact on expenses. Therefore, in times when the U.S. Dollar strengthens in relation to these foreign currencies, we would expect to report a net decrease in operating income. Conversely, in times when the U.S. Dollar weakens in relation to these foreign currencies, we would expect to report a net increase in operating income. Thus, changes in the relative strength of the U.S. Dollar may have a material impact on our operating results.
Interest Rate Risk
The Company’s investment portfolio of debt securities includes corporate bonds, treasury bills, asset-backed securities, a Euro liquidity fund, agency bonds, sovereign bonds and municipal bonds. Debt securities with original maturities

30


greater than three months are designated as available-for-sale and are reported at fair value. As of December 31, 2015, the fair value of the Company’s portfolio of debt securities amounted to $568,614,000 with principal amounts totaling $570,273,000, maturities that do not exceed seven years, and a yield to maturity of 0.85%. Differences between the fair value and principal amounts of the Company’s portfolio of debt securities are primarily attributable to discounts and premiums arising at the acquisition date, as well as unrealized gains and losses as of the balance sheet date.
Although it is the Company’s policy to invest in debt securities with effective maturities that do not exceed ten years, 96% of the investment portfolio as of December 31, 2015 has effective maturity dates of less than three years. Given the relatively short maturities and investment-grade quality of the Company’s portfolio of debt securities as of December 31, 2015, a sharp rise in interest rates should not have a material adverse effect on the fair value of these instruments. As a result, the Company does not currently hedge these interest rate exposures.
The following table presents the hypothetical change in the fair value of the Company’s portfolio of debt securities arising from selected potential changes in interest rates (in thousands). This modeling technique measures the change in fair value that would result from a parallel shift in the yield curve plus or minus 50 and 100 basis points (BP) over a twelve-month time horizon.
Type of security
 
Valuation of securities given
an interest rate decrease
 
No change in
interest rates
 
Valuation of securities given
an interest rate increase
 
 
(100 BP)

 
(50 BP)

 
 
 
50 BP

 
100 BP

Corporate bonds
 
$
232,786

 
$
231,869

 
$
230,951

 
$
230,034

 
$
229,117

Treasury bills
 
155,020

 
154,409

 
153,797

 
153,185

 
152,573

Asset-backed securities
 
87,266

 
86,921

 
86,576

 
86,233

 
85,889

Euro liquidity fund
 
47,964

 
47,847

 
47,730

 
47,613

 
47,496

Sovereign bonds
 
35,220

 
35,081

 
34,943

 
34,804

 
34,666

Agency bonds
 
9,231

 
9,195

 
9,158

 
9,122

 
9,085

Municipal bonds
 
5,502

 
5,480

 
5,459

 
5,437

 
5,415

 
 
$
572,989

 
$
570,802

 
$
568,614

 
$
566,428

 
$
564,241




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ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements:
 
Financial Statement Schedule:
 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Cognex Corporation:
We have audited the accompanying consolidated balance sheets of Cognex Corporation (a Massachusetts corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cognex Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 10, 2016 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Boston, Massachusetts
February 10, 2016

33


COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF OPERATIONS

 
Year Ended December 31,
 
2015
 
2014
 
2013
 
(In thousands, except per share amounts)
 
 
 
 
 
 
Revenue
$
450,557

 
$
426,449

 
$
307,651

Cost of revenue
102,571

 
94,067

 
62,889

Gross margin
347,986

 
332,382

 
244,762

Research, development, and engineering expenses
69,791

 
55,831

 
44,315

Selling, general, and administrative expenses
156,674

 
148,699

 
123,509

Operating income
121,521

 
127,852

 
76,938

Foreign currency gain (loss)
1,122

 
1,031

 
(646
)
Investment income
3,674

 
3,156

 
2,604

Other income (expense)
645

 
(283
)
 
(440
)
Income from continuing operations before income tax expense
126,962

 
131,756

 
78,456

Income tax expense on continuing operations
19,298

 
20,915

 
11,273

Net income from continuing operations
107,664

 
110,841

 
67,183

Net income from discontinued operations (Note 19)
79,410

 
10,644

 
6,390

Net income
$
187,074

 
$
121,485

 
$
73,573

 
 
 
 
 
 
Basic earnings per weighted-average common and common-equivalent share:
 
 
 
 
 
Net income from continuing operations
$
1.25

 
$
1.28

 
$
0.77

Net income from discontinued operations
$
0.92

 
$
0.12

 
$
0.08

Net income
$
2.17

 
$
1.40

 
$
0.85

 
 
 
 
 
 
Diluted earnings per weighted-average common and common-equivalent share:
 
 
 
 
 
Net income from continuing operations
$
1.22

 
$
1.24

 
$
0.76

Net income from discontinued operations
$
0.91

 
$
0.12

 
$
0.07

Net income
$
2.13

 
$
1.36

 
$
0.83

 
 
 
 
 
 
Weighted-average common and common-equivalent shares outstanding:
 
 
 
 
 
Basic
86,296

 
86,858

 
86,946

Diluted
87,991

 
89,071

 
88,901

 
 
 
 
 
 
Cash dividends per common share
$
0.21

 
$

 
$
















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

34


COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
(In thousands)
Net income
$
187,074

 
$
121,485

 
$
73,573

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
Net unrealized gain (loss), net of tax of $22, $0, and $13 in 2015, 2014, and 2013, respectively
(27
)
 
(118
)
 
104

Reclassification of net realized (gain) loss into current operations
201

 
46

 

Net change related to cash flow hedges
174

 
(72
)
 
104

 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
Net unrealized gain (loss), net of tax of ($279), $40, and ($147) in 2015, 2014, and 2013, respectively
(939
)
 
579

 
(190
)
Reclassification of net realized (gain) loss into current operations
(344
)
 
(673
)
 
(314
)
Net change related to available-for-sale investments
(1,283
)
 
(94
)
 
(504
)
 
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
Foreign currency translation adjustments, net of tax of ($711), ($870), and $22 in 2015, 2014, and 2013, respectively
(11,616
)
 
(9,400
)
 
82

Net change related to foreign currency translation adjustments
(11,616
)
 
(9,400
)
 
82

 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(12,725
)
 
(9,566
)
 
(318
)
Total comprehensive income
$
174,349

 
$
111,919

 
$
73,255

 







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

35


COGNEX CORPORATION – CONSOLIDATED BALANCE SHEETS
 
 
December 31,
 
2015
 
2014
 
(In thousands)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
51,975

 
$
55,694

Short-term investments
296,468

 
90,456

Accounts receivable, less reserves of $736 and $820 in 2015 and 2014, respectively
42,846

 
40,053

Inventories
37,334

 
29,223

Deferred income taxes
7,104

 
8,985

Prepaid expenses and other current assets
15,871

 
17,686

Held for sale assets (Note 19)

 
29,814

Total current assets
451,598

 
271,911

Long-term investments
273,088

 
400,845

Property, plant, and equipment, net
53,285

 
45,963

Goodwill
81,448

 
77,388

Intangible assets, net
6,315

 
9,670

Deferred income taxes
19,413

 
14,452

Other assets
2,609

 
1,505

Total assets
$
887,756

 
$
821,734

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,860

 
$
17,223

Accrued expenses
33,272

 
35,614

Accrued income taxes
985

 
1,048

Deferred income taxes
319

 

Deferred revenue and customer deposits
11,571

 
14,598

Held for sale liabilities (Note 19)

 
12,191

Total current liabilities
54,007

 
80,674

Reserve for income taxes
4,830

 
4,623

Other non-current liabilities
3,252

 

Total liabilities
62,089

 
85,297

 
 
 
 
Commitments and contingencies (Note 10)


 


Shareholders’ equity:
 
 
 
Common stock, $.002 par value –
Authorized: 140,000 shares, issued and outstanding: 84,856 and 86,542 shares in 2015 and 2014, respectively
170

 
173

Additional paid-in capital
311,008

 
251,717

Retained earnings
566,613

 
523,946

Accumulated other comprehensive loss, net of tax
(52,124
)
 
(39,399
)
Total shareholders’ equity
825,667

 
736,437

 
$
887,756

 
$
821,734





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

36


COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income
$
187,074

 
$
121,485

 
$
73,573

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Net gain on sale of discontinued business
(78,182
)
 

 

Stock-based compensation expense
20,168

 
15,158

 
10,620

Depreciation of property, plant, and equipment
9,868

 
8,443

 
7,305

Amortization of intangible assets
4,250

 
4,024

 
3,797

Amortization of discounts or premiums on investments
690

 
1,823

 
2,519

Realized (gain) loss on sale of investments
(344
)
 
(673
)
 
403

Revaluation of contingent consideration
(790
)
 

 

Tax effect of stock option exercises
(9,964
)
 
(7,871
)
 
(7,658
)
Change in deferred income taxes
(1,409
)
 
(2,364
)
 
2,234

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(3,950
)
 
(915
)
 
(11,311
)
Inventories
(9,457
)
 
(11,750
)
 
666

Accounts payable
(8,872
)
 
10,896

 
2,644

Accrued expenses
(2,831
)
 
7,812

 
5,593

Accrued income taxes
9,957

 
7,700

 
7,968

Other
2,155

 
2,202

 
(2,898
)
Net cash provided by operating activities
118,363

 
155,970

 
95,455

Cash flows from investing activities:
 
 
 
 
 
Purchases of investments
(686,650
)
 
(422,633
)
 
(370,781
)
Maturities and sales of investments
601,441

 
339,470

 
296,091

Purchases of property, plant, and equipment
(18,228
)
 
(20,934
)
 
(9,630
)
Cash paid for acquisition of business
(1,023
)
 

 

Cash paid for purchased technology
(10,475
)
 

 
(3,750
)
Net proceeds from sale of discontinued business
104,388

 

 

Net cash used in investing activities
(10,547
)
 
(104,097
)
 
(88,070
)
Cash flows from financing activities:
 
 
 
 
 
Issuance of common stock under stock plans
27,582

 
16,930

 
27,792

Repurchase of common stock
(126,351
)
 
(59,673
)
 
(47,908
)
Payment of dividends
(18,062
)
 

 

Tax effect of stock option exercises
9,964

 
7,871

 
7,658

Net cash used in financing activities
(106,867
)
 
(34,872
)
 
(12,458
)
Effect of foreign exchange rate changes on cash and cash equivalents
(4,668
)
 
(1,951
)
 
557

Net change in cash and cash equivalents
(3,719
)
 
15,050

 
(4,516
)
Cash and cash equivalents at beginning of year
55,694

 
40,644

 
45,160

Cash and cash equivalents at end of year
$
51,975

 
$
55,694

 
$
40,644

Non-cash items related to discontinued operations:
 
 
 
 
 
Stock-based compensation expense
$
1,533

 
$
1,099

 
$
837

Depreciation and amortization expense
566

 
1,141

 
1,079

Capital expenditures
482

 
631

 
749


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

37


COGNEX CORPORATION – CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
(In thousands)
 
Shares
 
Par Value
 
Balance as of December 31, 2012
 
86,110

 
$
172

 
$
165,162

 
$
436,466

 
$
(29,515
)
 
$
572,285

Issuance of common stock under stock plans
 
2,440

 
2

 
27,790

 

 

 
27,792

Repurchase of common stock
 
(1,719
)
 

 

 
(47,908
)
 

 
(47,908
)
Stock-based compensation expense
 

 

 
10,620

 

 

 
10,620

Excess tax benefit from stock option exercises
 

 

 
7,658

 

 

 
7,658

Tax benefit for research and development credits as a result of stock options
 

 

 
210

 

 

 
210

Net income
 

 

 

 
73,573

 

 
73,573

Net unrealized gain on cash flow hedges net of tax of $13
 

 

 

 

 
104

 
104

Net unrealized loss on available-for-sale investments, net of tax of $147
 

 

 

 

 
(190
)
 
(190
)
Reclassification of net realized gain on the sale of available-for-sale investments
 

 

 

 

 
(314
)
 
(314
)
Foreign currency translation adjustment, net of tax of $22
 

 

 

 

 
82

 
82

Balance as of December 31, 2013
 
86,831

 
$
174

 
$
211,440

 
$
462,131

 
$
(29,833
)
 
$
643,912

Issuance of common stock under stock plans
 
1,245

 
2

 
16,928

 

 

 
16,930

Repurchase of common stock
 
(1,534
)
 
(3
)
 

 
(59,670
)
 

 
(59,673
)
Stock-based compensation expense
 

 

 
15,158

 

 

 
15,158

Excess tax benefit from stock option exercises
 

 

 
7,871

 

 

 
7,871

Tax benefit for research and development credits as a result of stock options
 

 

 
320

 

 

 
320

Net income
 

 

 

 
121,485

 

 
121,485

Net unrealized loss on cash flow hedges net of tax of $0
 

 

 

 

 
(118
)
 
(118
)
Reclassification of net realized loss on cash flow hedges
 

 

 

 

 
46

 
46

Net unrealized gain on available-for-sale investments, net of tax of $40
 

 

 

 

 
579

 
579

Reclassification of net realized gain on the sale of available-for-sale investments
 

 

 

 

 
(673
)
 
(673
)
Foreign currency translation adjustment, net of tax of $870
 

 

 

 

 
(9,400
)
 
(9,400
)
Balance as of December 31, 2014
 
86,542

 
$
173

 
$
251,717

 
$
523,946

 
$
(39,399
)
 
$
736,437

Issuance of common stock under stock plans
 
1,520

 
3

 
27,579

 

 

 
27,582

Repurchase of common stock
 
(3,206
)
 
(6
)
 

 
(126,345
)
 

 
(126,351
)
Stock-based compensation expense
 

 

 
21,274

 

 

 
21,274

Excess tax benefit from stock option exercises
 

 

 
9,964

 

 

 
9,964

Tax benefit for research and development credits as a result of stock options
 

 

 
474

 

 

 
474

Payment of dividends
 

 

 

 
(18,062
)
 

 
(18,062
)
Net income