Business context and reporting period
Cognex Corporation supplies machine-vision products and related services, primarily for factory automation; service revenue was less than 10% of total revenue. This unaudited Form 10-Q covers the three and six months ended July 1, 2018, compared with periods ended July 2, 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $211.3m | $178.1m | $380.8m | $317.1m |
| Gross margin | $157.1m; 74% | $135.9m; 76% | $286.5m; 75% | $242.4m; 76% |
| Operating income | $63.5m | $60.0m | $98.1m | $97.2m |
| Net income | $56.2m | $56.5m | $93.4m | $102.0m |
| Diluted EPS | $0.32 | $0.32 | $0.52 | $0.57 |
| Operating cash flow | Not separately presented for quarter | $72.6m | $90.6m |
Q2 revenue rose 19% year over year, with management attributing growth mainly to logistics and automotive demand; approximately 4 percentage points of the increase came from foreign exchange. Six-month revenue increased 20%. Q2 operating expenses rose 23%, including higher headcount and stock-based compensation. Investment income increased, supported by higher portfolio yields and more funds available for investment.
Financial position and cash flows
At July 1, 2018, cash and cash equivalents were $129.2m and investments were $625.7m, totaling $754.9m, versus $828.0m at December 31, 2017. Current assets were $759.5m and current liabilities $124.6m. Total liabilities were $197.2m; the company reported no long-term debt. Six-month operating cash flow was $72.6m. Investing activities provided $73.1m, including net investment maturities and sales, while financing activities used $123.0m, including $121.3m of share repurchases and $15.5m of dividends. Capital expenditures were $21.7m.
Material changes, outlook and risks
- Gross margin percentage declined as application-specific customer solutions became a larger share of revenue; these solutions generally carry lower margins. Management expected Q3 gross margin percentage to be relatively flat versus Q2.
- Management expected Q3 2018 revenue to increase sequentially, with a notable contribution from consumer electronics due to timing of large orders. It expected consumer-electronics revenue to be below Q3 2017 and for full-year 2018 versus 2017; customer product cycles make quarterly timing uncertain.
- Management targeted annual R&D spending of 10%–15% of revenue and expected continued significant investment. It stated existing cash, investments, and operating cash flow should cover needs for the next 12 months.
- Consumer-electronics and automotive exposure, customer concentration, global economic conditions, foreign-exchange movements, competition, product transitions, suppliers, execution of growth, cybersecurity, and tax liabilities were among identified risks.
- Tax expense was $10.4m in Q2 2018 versus $5.3m in Q2 2017; the effective rates were 16% and 9%, respectively. Lower tax benefits from stock-option exercises contributed to relatively flat Q2 net income. Tax Act implementation estimates remained subject to change; potential releases of tax reserves could reduce tax expense by about $1.1m–$1.2m over the next 12 months.
- ASC 606 was adopted retrospectively. It accelerated recognition for certain software and customer-solution arrangements and changed certain accessory revenue from net to gross presentation. Prior-year results shown were restated; the filing notes that gross presentation increased revenue and cost of revenue without changing gross-margin dollars.
- Legal matters were described as routine, with no expected material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether expected Q3 sequential growth and the timing of consumer-electronics orders materialized, and how full-year consumer-electronics comparisons developed.
- Whether the lower gross margin mix and elevated operating-cost growth persisted as revenue expanded.
- How operating cash flow and working capital evolved, particularly inventory purchases and deferred revenue/customer deposits.
- Share repurchase execution: $76.1m used under the $150m authorization by July 1, leaving $73.9m authorized; also assess dilution and capital returns.
- Resolution of tax estimates and uncertain tax positions, including the potential reserve release and remaining Tax Act accounting decisions.