Cognex Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended July 5, 2015; interim financial statements are unaudited. Comparisons are with the periods ended June 29, 2014. Cognex supplies machine-vision products, primarily for factory automation. On July 6, 2015, it completed the sale of its Surface Inspection Systems Division (SISD); SISD is presented as a discontinued operation.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $143.8 million | $92.3 million | $245.2 million | $173.6 million |
| Gross margin | $113.3 million; 79% | $74.1 million; 80% | $192.4 million; 78% | $138.8 million; 80% |
| Operating income | $51.8 million; 36% of revenue | $26.0 million; 28% | $73.9 million | $47.4 million |
| Continuing-operations income | $43.5 million | $22.7 million | $63.0 million | $40.5 million |
| Net income | $43.7 million | $25.9 million | $64.2 million | $44.5 million |
| Diluted EPS, continuing operations | $0.49 | $0.25 | $0.71 | $0.45 |
| Operating cash flow | Not presented quarterly | $8.6 million | $31.7 million |
- Q2 revenue increased 56% reported (64% at constant currency); six-month revenue increased 41% reported (49% at constant currency). Management attributed the exceptional growth mainly to large consumer-electronics orders recognized in 2015.
- Q2 operating expenses increased 28% year over year, primarily from additional personnel. Gross margin declined mainly because of new-product introduction costs, volume discounts on large orders, and foreign-exchange effects; cost reductions and manufacturing efficiencies partly offset these pressures.
- Operating cash flow declined despite higher earnings, mainly reflecting a $52.7 million increase in unbilled revenue, alongside higher inventory and receivables. Management expected to invoice most of the unbilled amount in Q3 and collect it before year-end.
- At July 5, cash and cash equivalents were $61.7 million, short-term investments $223.5 million, and long-term investments $233.8 million. Total cash, cash equivalents, and investments were $518.9 million. Current assets were $490.1 million versus current liabilities of $80.5 million. The company reported no debt.
- Six-month capital expenditures were $9.5 million. Cognex repurchased $35.8 million of stock and paid $6.1 million in dividends during the period.
Material changes, outlook, and other notable items
- Management expected Q3 revenue to decline from Q2, as the large consumer-electronics orders were not expected to continue at the same level, but to exceed Q1 revenue. It also expected Q3 gross margin to decline from Q2, partly because of a higher mix of lower-margin maintenance and support services.
- Management targeted research, development, and engineering spending at 10%–15% of revenue and expected higher personnel-related expense comparisons to continue into the second half of 2015. It stated existing liquidity and operating cash flow should cover requirements for the next 12 months.
- SISD was sold to AMETEK for $160 million cash, subject to a $1.6 million working-capital adjustment and approximately $5 million of transaction costs. Cognex expected a pretax sale gain of approximately $125 million to be recorded in Q3. The company retained certain pre-closing liabilities and expected to provide transition services through the second half of 2015; related income was expected to be immaterial.
- A $3.5 million settlement resolved outstanding Microscan litigation: $1.667 million was recorded as a patent-license asset to be amortized over five years, and $1.833 million was expensed in Q2. Cognex said other pending or threatened claims, including matters relating to divested SISD, were not expected to materially affect its financial position, liquidity, or results.
- Subsequent to quarter-end, the board authorized an additional $100 million share-repurchase program, to begin after completion of the April 2014 authorization, and declared a $0.07-per-share dividend payable in September 2015.
- Key risks identified include dependence on large customers and consumer-electronics or automotive markets, global economic and industry cyclicality, foreign-exchange movements, supplier and demand-forecast risks, competition, technology and product-transition risks, intellectual-property litigation, tax exposure, and information-security or systems disruptions.
Important facts for investors to verify
- Whether the unusually large consumer-electronics orders recur, and how their absence affects Q3 revenue and margins.
- Conversion and collection of the substantial unbilled-revenue balance, and the resulting operating cash flow.
- Final SISD sale proceeds, working-capital adjustment, transaction costs, and Q3 gain recognition, together with any retained or indemnified liabilities.
- Continuing-business performance and expense trends after SISD’s divestiture, including the effect of the patent license and ongoing legal matters.
- Execution and remaining capacity of the repurchase authorizations and the company’s ability to sustain dividends while funding investment and growth.