Cognex Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 29, 2019; interim financial statements are unaudited. Cognex supplies machine-vision products and related services for manufacturing and distribution automation. Comparisons below are to the corresponding 2018 periods.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $183.3 million | $232.2 million | $555.9 million | $613.1 million |
| Gross margin | $135.7 million; 74% | $173.4 million; 75% | $411.0 million; 74% | $459.8 million; 75% |
| Operating income | $43.1 million; 24% of revenue | $77.8 million; 34% | $125.0 million | $175.9 million |
| Net income | $41.7 million | $80.4 million | $123.5 million | $173.8 million |
| Diluted EPS | $0.24 | $0.45 | $0.71 | $0.98 |
- Revenue declined 21% in Q3 and 9% for the nine months. Management attributed the decline primarily to lower consumer-electronics, especially smartphone-manufacturing, revenue, with delayed or reduced spending in other factory-automation industries also contributing.
- Q3 revenue by geography: Americas $65.3 million, Europe $64.2 million, Greater China $27.9 million, and other Asia $26.0 million. Americas revenue grew 14%; Europe declined 46% and Greater China declined 10% year over year. Strong logistics sales partly offset weakness elsewhere.
- Q3 standard products and services revenue was $139.9 million versus $151.0 million; application-specific customer solutions revenue was $43.4 million versus $81.2 million.
- Q3 gross margin percentage fell one point, primarily from lower manufacturing-overhead absorption on reduced sales. Operating expenses fell 3% in Q3, mainly due to lower incentive compensation. Nine-month SG&A rose 2%, while RD&E declined 1%.
- Nine-month operating cash flow was $185.3 million, versus $151.7 million in 2018. Capital expenditures were $13.5 million. Investing cash flow was an outflow of $115.0 million, principally reflecting net investment purchases; financing cash flow was an outflow of $55.6 million, including $61.7 million of share repurchases and $25.7 million of dividends.
Financial position and liquidity
- At September 29, 2019, cash and cash equivalents were $121.7 million, current investments $292.1 million, and non-current investments $504.6 million, totaling $918.4 million in cash and investments.
- Total assets were $1.390 billion and total liabilities were $151.2 million. The company reported no long-term debt and said existing cash and investments plus operating cash flow should meet needs for the next 12 months.
- Current assets were $625.8 million and current liabilities $81.2 million. The balance sheet included $16.2 million of operating lease liabilities; Cognex adopted ASC 842 in 2019.
Outlook, significant events, and risks
- Management expected Q4 2019 revenue to be lower than both Q3 2019 and Q4 2018. The sequential decline was expected mainly from seasonal consumer-electronics timing; the year-over-year decline was expected across a broader range of customers, particularly in China and Europe.
- Management expected Q4 gross margin percentage to be relatively consistent with Q3. It expected RD&E as a percentage of revenue to exceed the nine-month rate, partly because of the Sualab acquisition.
- Despite Q3 year-over-year growth in logistics, management expected Q4 logistics revenue to be below the prior year as a major customer delayed deliveries for new sites.
- On October 16, 2019, Cognex acquired Sualab, a Korean deep-learning vision-software provider, for approximately $195 million: about $171 million paid at closing and up to approximately $24 million in deferred, employment-contingent payments. Purchase accounting was still in progress.
- Management expected a Q4 discrete tax benefit of $100 million to $125 million from tax-structure changes related to European Union legislation, and a separate Q4 discrete tax expense of $27 million to $33 million associated with migration of acquired Sualab intellectual property. The filing also anticipated a related foreign tax payment of $35 million to $37 million in early 2020.
- Principal disclosed risks include consumer-electronics and automotive exposure, global economic conditions and tariffs or export controls, customer concentration, foreign-exchange fluctuations, supply-chain dependence, product and technology execution, competition, cybersecurity, acquisition integration, litigation, and tax exposure. Cognex reported routine legal claims that it did not expect to materially affect its financial position, liquidity, or results.
Important facts for investors to verify
- Whether Q4 revenue and logistics demand tracked management’s stated expectations, including the timing of the large customer’s delayed orders.
- The realized size and timing of the anticipated tax benefit, Sualab-related tax expense, and early-2020 tax payment.
- Sualab’s final purchase-price allocation, integration progress, and impact on RD&E and future results.
- Whether lower consumer-electronics demand and weakness in Europe and China persisted, and how customer and industry concentration affected recovery.
- Cash and investment levels after the acquisition, planned repurchases and dividends, and any changes to liquidity or capital-allocation plans.