www.cognex.com COGNEX 2018 ANNUAL REPORT Free to Cognex Shareholders The ultimate workout To let off steam, Cognoids play Ultimate Frisbee each workday. A4 USA Today or Cognex Today Company’s unique approach to annual report turns boredom into entertainment. A3 A ‘Play Hard’ tradition: Discs have been flying at company headquarters for 20+ years. PUBLISHED BY COGNEX CORPORATION Fake news is no joke: This is a parody of USA TODAY. Cognex reports ninth consecutive year of record revenue Newsline News Life Sports Money The ABC’s of RD&E Cognex is serious about maintaining its technology leadership. In 2018, the company reinvested $116M in research, development, and engineering. A2 Culture vultures Cognex has appointed a Minister of Culture (MOC) at each of its largest of- fices worldwide. Their role: host holiday parties and social events, oversee local community donation programs, assist with recognition programsand excel at their day jobs too! A3 Technical innovation drives global leader’s plans for future growth By Rob Willett Chief Executive Officer COGNEX CORPORATION NATICKCognex reported its ninth consecutive year of reve- nue growth in 2018, with good performance across most end markets and great performance in some newer markets, such as logistics. The company was also highly profitable, reporting op- erating and net margins of 27%. This growth follows an ex- ceptionally strong 2017, when massive investments in Cognex vision by a few large customers in OLED and smartphone man- ufacturing led to a 45% increase in our top line. When these customers scaled back their in- vestment in 2018, we were left Cognex 10-Year Revenue History (in millions) A little off the top The Cognex Cut the Crap (C3) initiative cuts down on needless bureaucracy in company processes. More than 250 ideas were submitted by employees. A4 $800 $600 $400 $200 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 A deeper understanding: CEO Rob Willett reflects on Cognex’s accomplishments during 2018 and shares his vision for the future. with a challenging hill to climb. Cognex more than made up the difference thanks to substantial contributions from the rest of A proven track record: Developing new products and expanding the company’s target market have led to impressive results. our business. Excluding reve- nue from those large consumer electronics customers, Cognex’s year-on-year revenue growth was 18%. Technology leadership and innovation continue to be im- portant drivers of our success. Our reputation among the most sophisticated factory automa- tion engineers in the world has never been better. They recog- nize Cognex as the technology leader in the industry and a trusted long-term partner for their vision and ID needs. As a result, we’re now engag- ing with higher levels of engi- neering and management at the global companies we serve and discussing programs that are increasingly ambitious in scope and long-term in duration. 2018 end market review Here’s a rundown of how Cognex fared in each of our three major end markets in 2018: Logistics Logistics is a large and rapidly expanding market for Cognex, thanks in part to exploding growth in global e-commerce. In the new environment of same- day delivery and rapid supply chain adaptation, companies are investing heavily in automa- tion to help move goods quickly and increase competitiveness. More and more of that auto- mation is enabled by Cognex’s image-based barcode readers, which are displacing older laser technology in this space. In 2018, our revenue from logistics showed remarkable strength, increasing by more than 50% over 2017, for a total of more than $100 million. In addition to the many opportu- nities for Cognex ID in logistics, we are also uncovering new applications for our vision ca- pabilities, such as measuring package dimensions and distin- guishing between boxes, poly bags, and other packaging. Our strategy for developing See RECORD REVENUE on page A2 Pump up the volume Sources indicate that the machine vision leader intends to continue to outperform market growth in the com- ing years. A6 USA Today Snapshots What the...? 6 odd applications for Cognex machine vision 66 3 5 2 4 4 ? 1 1 6: Check sex of chickens before they’re born. 5: Identify and package frozen pizzas. 4: Verify assembly of coffin handles. 3: Examine beer kegs for leaks. 2: Ensure quality of cosmetics. 1: Gauge size of English muffins. 10 Years and Counting Looking Back CEO Rob Willett recently celebrated his 10th year with Cognex. During that decade, he successfully led the team to deliver compounded annual revenue growth of 15% while fully embracing—and advancing—the company’s unique work culture. A Man of Real Character: Willett has dressed as a saxophone player, cowboy, and even Marty McFly in celebration of Cognex’s culture and creative annual reports. Up close and technical with Dr. Bob Known for his forward-thinking approach, the founder of Cognex takes a rare look back at the company’s modest beginnings. By Jack Hammer Robert J. Shillman, Ph.D. (“Dr. Bob” to friends) is the visionary entrepreneur who started Cognex Corporation, a pioneer and the world’s leader in the machine vision industry. Chances are, many items that you use every day are made with the help of machine vision technology. The Cognex story can be traced all the way back to Dr. Bob’s college days at MIT in the early 1970s. His doctor- al research focused on determining how people recognize the letters of the alphabet with the objective of imple- menting those rules on a computer to en- able it to read, independent of type style or even if handprinted. Cover story could not only read, but could also inspect objects via a video camera. He named the new venture Cognex (de- rived from “cognition experts”), and he persuaded two MIT graduate students Bill Silver and Marilyn Matzto join him by offering them free 10-speed bicycles… hey, whatever it takes. He also included stock options that eventually made them millionaires, but that’s anoth- er story. “I didn’t start Cognex to become rich; I started my own company because I wanted the freedom to work on whatever I wanted. I also wanted a place that was filled with smart, energetic, and creative people who enjoyed what they were doing, who liked to have stretch goals, and who worked hard to accomplish those goals,” said Dr. Bob. Dr. Bob continued, “And I wanted to work for a company where the manage- See UP CLOSE on page A5 #THINKYELLOW! Cognex Corporation | A1 Rear view mirror: Shillman founded Cognex not to get rich, but to work with smart, ener- getic, goal-oriented people. Fast forward to 1981. Still driven by his passion for machine vision, Dr. Bob took a leap of faith, left academia and invested his life savings of $86,000 to start a company with the goal of building computers that www.cognex.com Engineered to Move Fast! Cognex moves FAST on production lines and responding to customer requests. Try a pair of Cognex sneakers today and see how FAST you move! Cognex reports record revenue 2018 Revenue by Region (percentage) “We believe revenue from logistics can grow at a rapid pace for the foreseeable future.” —Rob Willett Flying off the shelves: Cognex’s image-based barcode readers are helping e-retailers keep up with customer demand for same-day product deliveries. Continued from page A1 this market is similar to the one we used successfully in the facto- ry automation market nearly 20 years ago: drive adoption by edu- cating customers and integrators on the value of our technology, while also learning from each in- stallation about what customers need and how to make our prod- ucts easier for them to use. One challenge we face is the need to provide more engineer- ing support to customers as they transition to vision from the old- er laser technology. While that is slightly dilutive to margins in the near term, we believe it’s worth the cost in order to win market share and introduce our technolo- gy to customers. As of the date of this report, we expect overall gross margin to improve as we move through the back end of 2019. With our continued strong performance and industry-lead- ing products, we believe revenue from logistics has the potential to grow at a rapid pace for the fore- seeable future. Consumer Electronics In 2018, our revenue from con- sumer electronics was negatively impacted when a small number of large OLED and smartphone customers scaled back their in- vestments after a very active 2017. However, Cognex sells into a very broad consumer electron- ics ecosystem, which is one of the largest and most sophisti- cated markets for machine vi- sion. Cognex customers include a wide array of brand owners (who design devices for consumers), contract manufacturers (who make devices), machine builders and OEMs (for equipment used to make devices), and their sup- ply chains and equipment mak- ers. Our products are employed throughout the entire manufac- turing process, from the lowest level component to packaging for the completed device. Cognex continues to uncover new customers, new applications, and new business in this sector, and we believe our opportuni- ties are strong in the medium and long term. Automotive Following consecutive two years of growth well exceed- ing 10% and a strong start to 2018, automotive revenue be- gan to slow in the second half of the year. For the full year we fell just short of the 10% growth we expect from our au- tomotive business over the long term. However, our longer-range view for this market remains positive based on three emerging trends that are expected to drive growth for Cognex vision and ID. Increased investment in electric vehicles After years of speculation, electric vehicles are beginning to move towards production, with Tier One manufacturers and brand owners announcing ma- jor investments. Manufacturing these vehicles and their compo- nent partslike lithium-ion bat- teriesrequires dedicated pro- duction lines, and we are working to make sure those processes in- clude vision and ID products from Cognex. Shift from sedans to SUVs In 2018, Ford Motor Company announced it would cease pro- duction of all but two sedans in North America and transition pro- duction to SUVs to meet changing consumer tastesa shift that will require investment in new auto- mation as plants are outfitted to produce new models. This change is symptomatic of an overall in- dustry trend towards different models which has helped to drive increases in automation spending among our customers. More electronic features in cars Your car’s fender is no longer just a piece of metal, and its side view mirror is no longer just glass. These components have evolved into complex pieces of electronic equipment with sensors for colli- sion avoidance, lane-keeping, and blind spot detection. Assembling RD&E Investment (dollars in millions) Cognex sustains its technology leadership by consistently investing in RD&E. $120 $100 $80 $60 $40 $20 00 these complex components re- quires the kind of advanced man- ufacturing enabled by Cognex vision and ID, and we anticipate new demand for our systems as manufacturers adapt their lines to integrate more electronic features in the future. The vast reach of Cognex culture Capturing demand in new market segments Cognex is constantly develop- ing new market segments that hold promise for future growth. Two of the most significant of these markets for Cognex are 3D vision and life sciences. 3D Vision 3D vision is an exciting new market which we believe has the potential to grow 50% a year in the long term. Even though our cur- rently small revenue base in this market was negatively impacted by lower investment from OLED display and smartphone manu- facturers in 2018, we remain con- fident about our prospects. Early in 2019, Cognex intro- duced several technically advan- taged new products that expand our offering in this space. These new products help us address a more diverse range of 3D inspec- tion applications, and when add- ed to our existing 3D product line and a sales force increasingly well trained to sell 3D, they will put Cognex in a stronger position to execute on this market’s growth potential. Life Sciences In life sciences, Cognex vision is integrated into lab equipment used largely for in vitro diagnostic testing. Each time Cognex is de- signed into a piece of equipment, it generates a stable, predictable revenue stream for many years post launch. I’m happy to report that mo- mentum for Cognex in life scienc- es is beginning to grow. We have now been designed into almost 50 machines launching into this market, with 20 new projects won in 2018 alone. The largest of these wins was an OEM project with a major European health- care company which is expected to generate several millions of dollars of revenue each year for Cognex starting in 2021. Up-and-Coming New Markets Another emerging trend in our business is the increasing use of machine vision in markets such as consumer goods and food manu- facturing that have historically been slower to adopt our tech- nology. While individually these markets still represent a small percentage of our total business, we believe orders from these cus- tomers will continue to increase as our products become less ex- pensive and easier to deploy and maintain. In addition, Cognex’s MX™ se- ries mobile terminala handheld device that enables users to em- ploy their smartphones for indus- trial barcode readingis gaining traction. While the contribution to our overall top line is still rel- atively small, it is a market that holds promise for the future. Investing in our future I am a strong believer that stra- tegic investments in our organi- zation help Cognex maintain its market-leading position. In 2018, investments took three those major forms: Developing our technology; expanding our sales coverage; and strengthening our infrastructure. Ensuring our Technical Leadership Our commitment to technology leadership remains a key priority for Cognex. The company regular- Americas 33% Europe* 38% Asia 29% *Includes revenue from a customer in Europe for Cognex products used in production processes in Greater China. ly contributes between 10% and 15% of revenue to RD&E. In 2018 we invested a record $116 million (14% of revenue), an increase of 17% over 2017. Among the most notable Cognex resulting product introductions from this investment in 2018 were: DataMan® 470, a high-per- formance fixed-mount barcode reader that has been rapidly ad- opted in the logistics industry as well as in general manufactur- ing. The DataMan 470 was the most successful product launch in Cognex history in terms of cus- tomer response and sales gener- ated in its first two quarters. The In-Sight® 9000 series, a powerful line of smart cameras that incorporates ultra-high-reso- lution capability previously avail- able only in more complex vision systems. VisionPro® ViDi™, a software package that integrates Cognex VisionPro software and the pow- erful deep learning technology we acquired with our 2017 purchase of ViDi Systems. This new package enables sophisticated customers to more easily implement deep learning in their applications and use it with other industry-leading Cognex vision tools. Deep learning is probably the most exciting technological in- novation to be introduced into industrial machine vision in the past 20 years. The technology is expanding our target market by enabling us to address appli- cations where traditional, rule- based vision cannot be applied or would require thousands of engi- neering hours to implement. Cognex is the leader in apply- ing this new technology to indus- trial machine vision. Deep learn- ing is generating great interest and enthusiasm among both Cog- noids and our customers, and that interest will continue to grow as more customers get up and run- ning with our deep learning tools and move this new technology from their labs to their produc- tion lines. Expanding Sales Coverage When I’m asked to name the sales opportunities that Cognex loses, I always say “the ones where we’re not present.” I am confident that when Cognex is in the mix, chances are excellent that we will win the business based on our outstanding technology, reputa- tion, ease-of-use, and support. Our biggest challenge is making sure Cognex is one of the options in front of customers when they are making a decision. With that in mind, we contin- ued to expand our direct sales and support organization in 2018, increasing the team’s headcount by 32%. We also continued our in- vestments in supporting and im- proving our distributor network. Adding more Salesnoids and developing our distributor net- work increases our coverage and enables us to connect with more potential customers. “Deep learning is probably the most exciting technological innovation to be introduced into industrial machine vision in the past 20 years.” Rob Willett Scaling Our Organization In addition to expanding sales coverage, Cognex made invest- ments in the company’s infra- structure to help us more effec- tively serve global customers and scale with our growth. Our most important investment in this area last year was the implementation of a new enterprise business sys- tem, SAP®. This was a major step in a multi-year undertaking to upgrade our information busi- ness systems, standardize global business operations, increase the quality and analytical value of the data we use to manage Cognex, and integrate standard processes across multiple geographies. 2018 Revenue by Industry Consumer Electronics Automotive Logistics Other Ready to grow industry-leading Cognex is a growth compa- im- ny with age-based products that enable the automation of manufacturing and distribution processes. We are at the forefront of applying deep learning techniques to ma- chine vision, and we continue to lead the way in our industry. As we went to press, a slowing Chinese economy and lower auto- motive sales in the Americas were creating uncertainty. While these are near-term concerns for us, over the long term we believe that market potential and Cognex’s continued leadership industry will enable us to significantly grow the company. In 2019, we will continue to fo- cus on developing the fundamen- tals that have led to our success: Industry-leading technology; A talented, dedicated, and engaged team of global Cognoids; A strong financial position that gives us the flexibility to invest in our growth strategies and deliver long-term share- holder value. I look forward to reporting back to you on our progress next year. Each major Cognex office around the world—16, to be exact—has a designated Minister of Culture (MOC). In addition to their day job, this individual is responsible for promoting Cognex’s traditions, values, and spirit in that office. From San Diego to Tokyo, and all the world-class cities in between, Cognex’s unique culture is thriving like never before. Natick, MA (Headquarters) San Diego, CA Portland, OR Cupertino, CA Boulder, CO Milwaukee, WI Cognex Corporation | A2 Cork, Ireland Paris, France Milan, Italy Aachen, Germany Budapest, Hungary Karlsruhe, Germany Ho Chi Minh City, Vietnam Shanghai, China Seoul, Korea Tokyo, Japan Cognex 2018 Annual Report Life At your service Sheila DiPalma Senior Vice President of Employee Services Sheila is responsible for talent recruit- ment, compensation, benefits, payroll, corporate communications, and employ- ee development. refer While other companies to Sheila’s position as Human Resources, Cognex prefers to call it Employee Services, because the primary function is to sup- port and develop the talented Cognoids who invest their time and creativity in Cognex. Sheila’s appointment as a corporate officer reflects the value the Board of Directors places on Cognex’s unique cul- ture and its strategic importance to the company’s success. Cognoids by the numbers 5 10 15 21 37 78 Average employee tenure in years Percentage increase in the number of women in engineering roles over past 3 years Percentage of Cognoids with the company 10 years or more Age of youngest Cognoid Average age of workforce Age of oldest Cognoid Cognex salutes machine vision Nyuk! Nyuk! Nyuk!: Adopted from The Three Stooges, Cognoids perform the Cognex salute and recite the words, “To preserve and enhance vision.” New dress code is announced Cognoids dress up in costume to celebrate Halloween, the company’s favorite holiday. Is there a doctor in the house? More than 50 Cognoids have earned a Ph.D. or doctoral degree! Wackier the better: Offices close early to hand out prizes for the best costumes. Task masters: Well over 400 employees have a Master’s degree on their walls. Super selfie: Dr. Bob (far left) and Sheila DiPalma (third from right) lead Cognex’s annual Culture Camp at company head- quarters in Natick, Massachusetts. Candidates flock to Cognex in droves Quirky culture attracts top minds in machine vision By Brook Lynn Bridge NATICKMore job candi- dates than ever before strode through the doors of Cognex in 2018 with resumes in hand. All of them were eager to land a position at the company known for its occasionally quirky, often zany, and always inspirational work culture. The company’s motto is a clear statement of its culture: Work Hard, Play Hard, Move Fast. Candidates who land jobs at Cognex are referred to as Cog- noids. “Cognoids are our most important asset,” said Sheila DiPalma, Cognex’s Senior Vice President of Employee Services. “The top minds in the field recognize Cognex as a place where they can work on cut- ting-edge technology and de- velop novel machine vision solutions that make a real dif- ference in factories and dis- “Cognoids are our most important asset.” Sheila DiPalma tribution centers around the world. The only thing smarter than our vision and ID products are the people who stand be- hind them.” Wanted: Positive Thinkers The recruiting philosophy at Cognex starts with a sim- ple premise: hire smart, ac- people who tion-oriented have attitude positive about work, and about life in general. a Cognex believes that attitude is a little thing that makes a big difference. “If the choice is between hiring a person with a positive attitude or hiring a person with a particular skill, I’ll take the person with the positive attitude. You can teach skill, but you can’t change atti- tude,” DiPalma said. Cultural Events Cognex is proud of its cre- ative cultureand that unique culture is one of the reasons people choose to work at Cognex. For example, each year you’ll find a building full of Cognoids dressed in costume celebrat- ing Halloween, the company’s favorite holiday. Other offbeat events include a summer af- ternoon each year when Dr. Bob drives up in a real ice cream truck dressed as the Cognex “Good Humor Man” and hands out free ice cream to Cognoids. “We enjoy being silly on occasion,” explained DiPalma. “Laughing at ourselves helps create an informal, collabo- rative environment and that attracts the type of people we want.” Don’t let the fun and games fool you, though; Cognoids take their work very seriously. “We empower our team to have fun, but also to do the right thing. The idea is to get Cognoids mo- tivated around common objec- tives and see them deliver re- sults,” said DiPalma. And that’s how the company can recruit the best of the best, which ensures that Cognex re- mains a leader in the machine vision industry. Turning boredom into entertainment Annual reports with attitude We live in an age where information is available at our fingertips. If investors want to learn about a company’s financial condi- tion, they can simply go online for the data. It begs the question: Are printed annual re- ports for public companies still necessary? It turns out the answer is yes, even in the digital age. Realizing that the feder- al regulation mandating annual reports isn’t going to be rescinded anytime soon, Cognex thinks creatively to find ways to comply and still have fun. Making Lemonade from Lemons It’s quite clear that the company treats the annual report as more than just a recitation of numbers and statistics. Instead, Cognex strives to create annual reports that showcase the compa- ny’s unique culture and innovative spirit. “We figured, if we have to comply, let’s make lemonade from lemons!” said Dr. Bob Shillman, chairman and founder of Cognex. “Most annual reports are mind-numbingly dry and boring. But that’s not Cognex. We’re a collection of motivated and talented people, and we want our annual reports to reflect that.” A perfect example is the company’s latest annual report, which is what you’re holding right now. Obviously masquerading as a USA TODAY® newspaper, the Cognex 2018 Annual Report is a par- ody intended to show off the company’s unconventional side and hold the reader’s attention at the same time. A History of Humor Cognex has been spoofing famous publications, pop culture icons and current events in their annual reports for the past 20 years. Truth be told, it’s gotten to the point where many Cognex shareholders look forward to the document each year just to see the company’s latest angleand, of course, have a hearty laugh. Some find Cognex annual reports so interesting that they collect them. We hear earlier reports have even been for sale on eBay®. “Lighten up, we’re just having fun!” Dr. Bob Cognex’s annual reports have been honored with a slew of awards over the years, including the prestigious MerComm ARC Award, the world’s largest international competition honoring excellence in annual reports, and the League of American Com- munications Professionals “Top 100 Worldwide” Vision Award for best-in-class practices. The only ones who aren’t thrilled with Cognex’s outrageous an- nuals are the attorneys for the publications being parodied. “We receive letters, and my response to them is, ‘Lighten up, we’re just having fun!’” said Shillman. “Imitation is the sincerest form of flattery.” WORLD TOUR Touring the top “Play Hard” activities at Cognex offices in 2018 Portland, OR Soccer and Smoothies Portnoids cre- ated their own fitness program called CogFit, a series of eight weekly Play Hard events. Employees received a point for each event they attend- ed, with the chance of winning a grand prize at the end. Events included kickball, soccer, and smoothie-making! Milwaukee, WI Paddle On Milwaukee Cog- noids took to the wa- ter for their Play Hard event. The group spent the day pad- dling the Milwaukee cuts River, which through the heart of the city. Not only was it a fun cardio workout, but people also got to see their his- toric downtown from a brand new perspective. Boulder, CO Bad-Axe Cognoids Natick, MA Intra-Office Olympiad in Cognoids Boulder experi- enced the rush of axe throw- ing! After a brief demo and a few practice rounds, Cognoids went head-to-head to see who was the most accurate with their axe. No Cognoids were harmed during this Play Hard event! Members of the global Finance team in their competed intra-office own competition. Cognoids from five international offices challenged each other in seven thrilling events: eating doughnuts on a string, making paper clip trains, chair racing, target tossing, trash can basketball, corn hole, and a relay race. Team Ireland took home the gold! Corknoids Cork, Ireland Corknoids Cool Down took a break from Working Hard to enjoy an ice cream social. Their treat of choice was the ever-popular “99,” which is a cone with ice cream and a choc- olate stick. Good thing the mobile ice cream van had plenty of nap- kins, as the only thing more plen- tiful than the ice cream was the sunshine! Aachen, Germany Boulders and Beers Aachen Cognoids mastered rock climbing during their popular Play Hard event. The group geared up and raced each other to the top of the boulder in no time flat. After some intense climbing, the Cognoids were ready to enjoy dinner together. Karlsruhe, Germany Oktoberfest Seoul, South Korea Non-Stop Fun K a rl s r u h e Cognoids continued their annual tradition of attending Oktober- fest, the world’s largest folk festi- val. The group gathered with par- tygoers under an enormous tent to celebrate in style. There was beer, music, dancing, foodand, of course, more beer! Cognoids from the Korea and Vietnam offices are still buzzing with excitement over their out- ing in Namhae. The group came together for a three-day event filled with non-stop activities like deep-sea fishing, paragliding, and games of agility and coordination. Shanghai, China Murder Mystery Cognoids from the Shanghai office transformed into detectives for a murder mys- tery Play Hard event. Dressed as different characters, team mem- bers attended a fictitious party where the murder took place. No one was above suspicion! The group worked together to solve the crime and reveal the culprit. Tokyo, Japan Up, Up, and Away Tokyo Cognoids reached new heights with their indoor skydiving Play Hard event. After suiting up and completing a brief training ses- sion, Cognoids entered a wind tunnel to experience the awe- some power of flight. Cognex Corporation | A3 Cognex 2018 Annual Report Sports Celebrate like champs If professional sports teams celebrate victories with champagne, why can’t Cognex? Chalk it up to competition Cognoids compete with everything they’ve gotincluding powdered chalk. A bubbly mood: When Cognex achieves a milestone, employees gather for a celebratory toast. True colors: Natick Cognoids battle it out during a Play Hard activity. President’s Award champions named for 2018 By Eileen Dinn NATICKA favorite aspect of Cognex’s corporate culture is its focus on celebrating employ- ees’ individual and collective accomplishmentsin fact, rec- ognition is one of the company’s core values. This tradition of honoring success culminates each year with the President’s Awards, Cognex’s most signifi- cant recognition. A total of 28 individual Cog- noids across the globe received a President’s Award in 2018 for their contributions to the com- pany’s overall success. Their ex- traordinary achievements ex- emplified Cognex’s values and dedication to excellence. contributions “These are our top perform- ers,” said Cognex President and CEO Rob Willett. “They pushed themselves beyond their day- to-day responsibilities to make important to projects, to our customers, to our business, and to their fel- low Cognoids. So of course, they deserve to be recognized.” The ceremonies took place during the annual meetings at each office. In addition to be- ing recognized with awards, the winners also received cash prizes! Crap-cutting has its rewards: Natick Cognoid Natalie Crosier is awarded a golden scissors trophy for her winning idea. Cognoids rewarded for their “crap” ideas Cognex Cuts the Crap (C3) initiative draws 291 submissions worldwide Launched three years ago, the Cognex Cuts the Crap (C3) initia- tive identifies and eliminates needless bureaucracy that eats up Cognoids’ time and slows down company progress. In 2018, Cog- noids around the world submitted an astounding 291 ideas, each focused on removing an obstacle that prevented them from Mov- ing Fast, the third element in the company’s Work Hard, Play Hard, Move Fast motto. timesaving Creative Cognoids came up with an incredible range of suggestions. Among them were removing the Reply All button to mini- mize emails, replacing manual systems with electronic ones, and even renaming conference rooms to avoid confusion. The Crap Cutting Commit- teea panel comprised of Cognex executives and lead- ernoidshad their hands full sifting through the innova- tive solutions. In the end, 13 Cognoids were recognized for ideas that were implemented by Cognex. Subtle hints: CEO Rob Willett persuades the team to think lean. In true Cognex fashion, the winners were rewarded for their cerebral calisthenics. Seven Cognoids received the top prize of $3,000 while six received $1,500. Congratulations to everyone who stepped up to the plate and helped Cognex cut crap in 2018! The race to stay ahead Cognex keeps competitors at bay by constantly innovating. investing and This strategy enables the machine vi- sion leader to gain more knowledge and expertise. In 2018, the company hit full stride with record revenue. USA Today Snapshots By the Numbers Cognex holds more than 1,000 patents issued and pending. All-star team announced Cognex Board of Directors: Robert J. Shillman Chairman & Chief Culture Officer Cognex Corporation Patrick A. Alias Senior Vice President Cognex Corporation Eugene Banucci Founder, Former Chairman & Chief Executive Officer ATMI, Inc. Theodor Krantz Vice President & Chief Financial Officer Airmar Technology Corporation Dianne M. Parrotte Independent Consultant Jerry A. Schneider Financial Expert, Business Consultant, and Philanthropist Anthony Sun Former Managing General Partner Venrock Associates Robert J. Willett President & Chief Executive Officer Cognex Corporation Cognex Executive Officers: Robert J. Shillman Chairman & Chief Culture Office Robert J. Willett President & Chief Executive Officer John J. Curran Senior Vice President & Chief Financial Officer Ultimate Frisbee takes flight in Massachusetts Flying discs appear at company headquarters NATICKWith just a flick of the wrist, Cognex employees are re-energizing themselves in the middle of the workday. They’re playing Ultimate Fris- bee, a sport that flies under the radar for many athletes, but to Cognex employees at the com- pany’s headquarters in Natick, Massachusetts, it’s the only sport that matters. Cognoids have been com- peting on the same field just outside the main building for more than two decades. On any given day, you can see em- ployees in shorts and T-shirts sprinting, diving, and just gen- erally mucking it up. It doesn’t matter what the weather is, ei- ther. Rain, snow, slush, extreme heatnothing stops these har- dy Cognoids from getting their Ultimate Frisbee fix. Requiring equal parts strat- egy and athleticism, Ultimate Frisbee is a fun alternative to an indoor gym. Who needs an elliptical machine when you can run around outside chasing a Frisbee with your friends? It’s an incredible pick-me-up, too! Cognoids feel invigorated after a gameboth physically and mentally. According to Sheila DiPalma, Senior VP of Employee Services, the Ultimate Frisbee tradition fits right in with the company’s culture. “We couldn’t be happi- er with it,” she said. “Part of our motto is ‘Play Hard,’ and that’s what we encourage Cognoids to do!” Sheila DiPalma Senior Vice President, Employee Services Office origin of winning ideas • Berlin, Germany • Budapest, Hungary • Cork, Ireland • Karlsruhe, Germany • Massachusetts, USA • Milton Keynes, UK • Minnesota, USA Cognex Crossword 1 2 3 4 8 12 5 7 14 18 21 9 10 13 19 11 17 20 15 6 16 Cognex Corporation | A4 Across 4 _________ of Culture (hint ‘M’) 8 President and CEO 10 Dr. Bob’s last name 13 Cognex brand color 14 Name of Cognex barcode readers 17 Headquarter location 18 Paid quarterly by Cognex since 2003 19 Cognex’s favorite holiday 20 How Cognoids move 21 The only way to play Down 1 Fast-growing market for Cognex products 2 Type of intellectual property protection 3 SVP of Employee Services 5 Popular sport among Cognoids 6 Cognex stock symbol 7 A Cognex employee 9 Cognex anniversary 11 Cognex’s CFO 12 MOC gathering 15 CGNX trades on this exchange 16 Cognex is derived from Cognition _______ Slipped discs: Flinging the Frisbee around enables Cognoids of all ages to work up a sweatand sharpen their collaboration skills. This is going to be the best Cognex vision system ever! Unscramble these five Jumbles, one letter to each sqaure, to form five ordinary words. GTBUED NIVTES IRPFOT XGOCEN TMYSES THE COGNEX ENGINEER WEARS EYEGLASSES BECAUSE HIS GOAL IS — Now arrange the circled letters to form the surprise answer, as suggested by the above cartoon. Answer here: See solutions on page A6 To accomplish that, there must be reforms to the proxy process to ensure that those who vote the shares do so in the best interest of the shareholders who own those shares. In essence, it comes down to the question, “what is the purpose of a publicly traded corporation?” When I searched Google® for background on that question, the first article that I came across was by the noted economist, Milton Friedman. In it, Friedman states, “…there is one and only one so- cial responsibility of businessto use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”4 I was quite surprised to discover that this position has been around for a very long time (the article was written in 1970 nearly 50 years ago), and, I was also quite surprised that it has been challenged in the past, as it is today. Where does Cognex stand on the issue of ESG and on the role of our company? The answer is, and has always been since our found- ing in 1981, in our mission state- ment, which has two parts: To be the largest and most suc- cessful company in the world that provides products which incorpo- rate Artificial Intelligence technol- ogy for understanding images, and To be a company that exceeds the expectations of its stakehold- ers…its customers, employees, ven- dors, shareholders, and neighbors. I suppose that the first part of our mission is similar to that of many other companiesevery company wants to be first in its field. However, we believe that by be- ing first, Cognex not only makes high profits, but by doing so it also contributes to society. How is that possible? How can making a lot of money be a good thing for society? Although the company doesn’t have any specific programs for helping the environment, fighting global warming or fighting pov- erty, our products play a very im- portant role in each of these areas. For example, our machine vision sensors and systems enable the production of items that have no flaws or defects…thus eliminat- ing rework and scrap that would otherwise end up in landfills. They also enable factories to operate ef- ficiently and use less energy and, therefore, create fewer pollutants that harm the environment. And, through our products’ key role in enabling automation, which lowers manufacturing costs, we help make it possible for people around the world to purchase products that they would other- wise not be able to afford. And our advanced barcode read- ers enable on-time and accurate deliveries from major e-retailers and, at an increasing number of airports, we ensure that your luggage arrives on the same flight as you do. Fewer packages to be re-routed, fewer bags lost means less fuel burned and less carbon dioxide in the at- mosphere. The second part of our mission is rather unusual, and Cognex takes that part of our mission as seriously as we do the first. We strive to take care of all our stakeholders: our customers, our employees, our vendors, our shareholders and our neighbors. For our customers, we provide the highest quality products and services at prices that they can readily afford, and we survey them to ensure that we continue to satisfy their needs. With re- gard to our employees, we strive not only to give them very com- petitive compensation packages, but we also work hard to ensure that Cognex is an enjoyable place to work at each day. With regard to our vendors, we pay our bills on time (no kidding!) and we pay fair pric- esnot necessarily the lowestfor their prod- ucts and services; we want them to be prof- itable so that they will be able to continue to serve us well and enjoy doing so! We even survey our vendors to ensure that our purchasing department treats them as we treat our em- ployeesas valued members of the Cognex team. Regarding our shareholders, they share in our success via quarterly dividends, stock repurchases and, hopefully, through share appreciation. And, finally, regarding our neighbors, we are a model corporate citizen; we’ve been recognized as one of the most charitable companies in Massachusetts, helping our com- munities in various ways, beyond paying taxes. And, as a worldwide corporation, we recognize that we have neighbors around the globe. To help serve their needs, we make meaningful charitable contributions each year to local causes ranging from providing computers to schools and librar- ies in Natick, Massachusetts to providing seeing eye dogs to the blind in Cork, Ireland. And, we accomplish all of this without the dictates of government or pressure from fund managers or other organizations. Milton Friedman would certainly appreciate the first part of our mission statement, because it is about profit. And, although there is no explicit commitment made re- garding ESG in the second part of our mission statement, it is clear- ly implied. In addition to what Cognex does directly for the environment and for society, our success en- ables all our stakeholders to “do their own thing” for causes that they find important. By mak- ing our stakeholders richer, each of them can do whatever they wish to “make the world a better place,” with the products that we sell them, with the salaries and stock option grants that we give them, with the monies that we pay them, and with the dividends and growth stock that they hold. The free market has worked great for Cognex and for all its stakeholders for the past 40 years; why change it? Robert J. Shillman (“Doctor Bob”) Chairman and Chief Culture Officer Cognex Corporation 1 Senate Bill 3348, The Accountable Capitalism Act. See: https://www. congress.gov/bill/115th-congress/sen- ate-bill/3348/text 2 Corporate Governance Update: Proxy Voting and the Future of Corpora- tions. New York Law Journal, Novem- ber 29, 2018. See: https://www.law. com/newyorklawjournal/2018/11/28/ proxy-voting-and-the-future-of-corpo- rations/?slreturn=20190002144610 3 Ibid. 4 The Social Responsibility of Busi- ness is to Increase its Profits. The New York Times, September 13, 1970. See: https://www.nytimes.com/1970/09/13/ archives/a-friedman-doctrine-the-so- cial-responsibility-of-business-is-to.html “We’re replacing what works with what sounds good” Opinion Better to leave the free market alone Cognex Chairman Dr. Robert Shillman asks, “What’s the purpose of a publicly traded corporation?” I’ve been reading your Mon- ey section as well as other business-focused publica- tions for many years. Lately, there has been quite a lot of discussion about the faults of our capitalistic system and the purpose of publicly traded corpo- rations. As the Chairman of Cognex Corporation, the company that I found- ed over 38 years ago and which became public in 1989, I want to express my con- cern over this trend of bashing both our free enterprise system and our businesses which have thrived under that system for the past 200 years. I’d like to start by quoting Thomas Sow- ell, a noted economist and Senior Fellow at Stanford University’s Hoover Institution: “Much of the social history of the Western world over the past three decades has been a history of replacing what worked with what sounded good.” Today, what “sounds good” to an increasing number of peo- ple are “democratic socialism,” “a living wage,” “fighting glob- al warming,” “reducing income inequality,” “open borders and immigration,” “sustainability,” and “oversight over corporations, in particular regarding environ- mental, social, and governance issues (ESG).” I’m not given enough space here to discuss all the above is- sues, so I’ll just focus on the last one: oversight over corporations and the purpose of publicly trad- ed corporations. Oversight over anything can take many forms; it can range from simple to complex, from mild to severe. When it comes to corporations, oversight can range from simply requiring companies to report on their efforts, to the onerous terms in government leg- islation such as that proposed in The Accountable Capitalism Act (Senate bill 3348) introduced by Senator Elizabeth Warren in Au- gust of 2018. If passed, that bill would, essentially, put the federal government in control of all U.S. corporations…both public and private…having revenues greater than $1 billion. If you think that this is an exaggeration, then read the bill yourself.1 As Warren’s proposed legisla- tion shows, there is an increas- ing desire to hold corporations accountable to all their “stake- holders,” not just to their share- holders. This Stakeholder Theory is in stark contrast to the Shareholder Theo- ry that was articulated by Milton Friedman many years ago, which states that the role of a corporation is to serve its shareholders by making as much profit as possible (in to- day’s terms, he would say that the role of a corporation is to increase shareholder value as much as pos- sible). Until recently, Friedman’s view held sway, but as Warren’s proposed leg- islation shows, it is un- der intense attack. Fortunately, neither the U.S. government nor its agencies, such as the SEC, have yet taken steps to influence or con- trol how companies choose to function with regard to ESG is- sues. Unfortunately, that is not the case for large, institutional fund managers. These managers currently control over 80 percent of the market value of the Russell 3000 and the S&P 500 and, there- fore, they hold significant power over their portfolio companies, via their proxy votes, which they use to pressure “their” compa- nies to include ESG factors when making business decisions.2 This is despite the fact that the com- panies in their portfolios are not really their companies; the actual individual shareholders who own shares in the mutual funds are the real owners of those companies. And I’m quite certain that the proxy departments of those funds do not solicit input from those shareholders regarding how to vote their proxies. If they asked “By making our stakeholders richer, each of them can do whatever they wish to make the world a better place.” Dr. Bob them, “Do you want the board of directors and the managers of your companies to spend time and energy on environmental, social, and governance issues or do you want them to spend all of their time and energy on increas- ing the value of your shares?”, I’m rather sure that an overwhelming number of them would choose the latter. The is- sue of proxy voting by large institutional share- holders is discussed in de- tail in a very recent article published in the New York Law Journal which concludes, “The best bulwark against overreach by institutions, proxy advisors, and other activists is a contin- ued focus on the interests of the individual Main Street investor.”3 Up close and technical with Dr. Bob Cognex Values Guiding Principles When Dr. Bob started Cognex, he had a specific mission statement in mind. Made up of two goals, this mission statement still guides the company 38 years later: To be the largest and most successful company in the world that provides products which incorporate Artificial Intelligence technology (AI) for understanding images, and To be a company that exceeds the expectations of its cus- tomers, employees, vendors, shareholders, and neighbors. Eyes Straight Ahead Looking in the rear view mirror occasionally is fine for seeing just how far he’s gone, but Dr. Bob knows he must “Success is a journey, not a destination...” Customer First Customer satisfaction is our top priority. Pride We are proud of our company. N Excellence Good is not good enough; we strive for excellence. Integrity We hold ourselves to the highest ethical standards. Dr. Bob Perseverance We don’t stop until it’s done right. Recognition We acknowledge those who contribute to our success. The road ahead: Shillman takes great pride in anticipating and avoidingspeed bumps that might prevent Cognex from reaching its goals. Continued from page A1 ment would tolerate, or better yet, where the management preferred outspoken people like myself who don’t care about office politics or bureaucratic rules, but who want to do what’s right for the company and for its customers.” Unable to find an existing company like that, Dr. Bob decided to create one himself. And just like that, Cognex was born. spend most of his time looking at the road ahead to cir- cumvent roadblocks and to set new milestones in technol- ogy, revenue, and profits. “Success is a journey, not a destination, and when we look down the road, we see tremendous opportunities in the years ahead for Cognex in a variety of applications and industries,” he concluded. “We’re excited about continuing the journey that I started 38 years ago.” Who knows, maybe this was just the first chapter in the Dr. Bob and Cognex story. Enthusiasm We enjoy what we do, and it shows. Sharing When Cognex wins, we all win! Creativity We delight in being different. Fun We play hard to celebrate our achievements. Cognex Corporation | A5 Cognex 2018 Annual Report Money USA Today Snapshots By the numbers More than 2 million vision-based products have been shipped since 1981. 2,000,000+ Vision Systems Shipped Special Insert An open book: Read more about Cognex in the company’s 2018 Form 10-K. USA Today Snapshots A winning hand Cognex holds all the cards >$1 Billion Total cash returned to shareholders (since 1981) 21%5-Year Revenue CAGR (2014-2018) s 1 6 Y e a r i v e C o n s e c u t o f P a y m e n t D i v i d e n d s R A PLAY H K D! P L AY H A R H R A O R W D ! M O V E FA R D ! PL A ! AR D H K R O W K H A A ST! F R O W MOV E D ! ! T S Y H A R D ! T! M OVE F A S 7 4 % G r o s s M a r g i n ( 2 0 1 8 ) 14 %Revenue invested into R (2018) &E D JUMBLE SOLUTION BUDGET INVEST PROFIT COGNEX SYSTEM The Cognex engineer wears eyeglasses because his goal is – BETTER VISION Long-term economic strategy Cognex enters adjacent markets that hold promise for future growth. Cognex reveals secret recipe Customer focus, innovation, and an entrepreneurial spirit are key ingredients in Cognex’s “special sauce.” Forward momentum: Life sciences is a promising market full of growth potential. Home cooking: Cognex brings its business to a boil by keeping one eye on the future. ESG: One size doesn’t fit all companies “Our approach is to find an appropriate balance that’s meaningful to Cognex.” John Curran said Curran. “By focusing on what we do bestproducing best-in-class products for man- ufacturers around the world and making decisions that align with our 10 core values, all our stakeholders will ultimately benefit.” USA Today Snapshots Win-win effect T o D o L i s t [ ] R e d u c e s c r a p [ ] C o n s e r v e r e s o u r c e s [ ] R e d u c e p r o d u c t r e t u r n s [ ] P r o d u c e p r o d u c t s a t l o w e r p r i c e s [ ] I n c r e a s e c u s t o m e r s a t i s f a c t i o n Cognex machine vision helps manufacturers: culture and the fact that they have always been focused on exceeding the expectations of all of their stakeholderscustom- ers, employees, vendors, share- holders, and neighbors.” Curran reasons that Cognex’s culture and mission will, in turn, drive revenues and profits, and create long-term and sustainable value for the company. For ex- ample, the Play Hard part of Cognex’s cul- ture makes the com- pany a great place to work and increases employee retention as well as motivation. This is a huge source of value creation for the company. “Our approach is to find an appropriate balance that’s mean- to Cognex,” ingful A meaningful approach: CFO John Curran speaks candidly about ESG. By Rachel Harmony NATICKEnvironmental, social, and governance (ESG) factors are increasingly being prioritized by asset manag- ers. While the motivation is certainly understandable, one big obstacle is the difficulty to benchmark diverse companies using uniform criteria when ESG means different things to different people. Cognex serves as a great ex- ample of a company that, by remaining true to its corporate values, has aligned itself with the broader principles of ESG. “Actually, we’ve never really thought in terms of ESG,” said Cognex Chief Financial Officer John Curran, who joined the company two years ago. “What attracted me to join Cognex is the strong and unique corporate Cognex leads the way in machine vision By Howie Stank NATICKEvery day millions of people perform basic tasks that can be done better and more cost-effectively by ma- chines. This reality alone would be enough to drive the growth and adoption of machine vision linked to robotics and advanced automation over many years. But there are other reasons behind burgeoning machine vision sales. These include a demand for higher quality products, wages rising fast- er labor shortages, a desire for higher throughput, and products that increasingly becoming are than productivity, Well-oiled machine: The adoption of machine vision is expected to continue for many years, and that’s great news for Cognex’s future. too small for human hands to assemble. Bigtime Player A leading player in the fast-growing machine vision market is Cognex Corporation. The company focuses on indus- trial applications where their industry-leading software pro- vides customers with a critical advantage as they strive to re- duce costs, bring new technol- CROSSWORD SOLUTION Information for Cognex Shareholders 1 L O G I S T I C S N I S L L E 11 C U R R A 17 N 20 F 15 N A S D A Q A M N D R D 2 P A T E N T 10 S T E R S 9 T 3 D I P A L H I L L M A I R T 13 Y E I G 19 H A E L L O W C K A L L O W S T 6 C G N X 16 E X P E R T S E N 4 M 7 C 8 W O G N O I 14 D A V I D 21 H 12 C U L T U R E C A M P 5 U L T I M A T E F R I S B E E 18 D Design PointOne Marketing & Design www.pointonemarketing.com Creative Director Don Ferber Original Photography David Shopper www.davidshopper.com Creative Writing John Cacciatore www.johncacciatore.com NATICKThe Cognex team wants sharehold- ers to know that a copy of the Annual Report on Form 10-K filed with the Securities and Exchange Commission is available free of charge upon written request to Cognex Investor Relations at the address below, or via online request at www. cognex.com/investor. Corporate Headquarters Cognex Corporation One Vision Drive Natick, Massachusetts 01760 Telephone: (508) 650-3000 www.cognex.com Forward-Looking Statements This report, including the Chairman’s letter and the CEO’s letter, may contain “forward-look- ing statements” within the meaning of the Se- curities Act of 1933 and the Securities Exchange Act of 1934. For further information, please see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K. A discussion regarding risks associated with forward-looking statements is included under the heading “For- ward-Looking Statements.” All information in this report is subject to change without notice. Cognex, In-Sight, DataMan, and VisionPro are registered trademarks, and ViDi is a trademark of Cognex®. All rights reserved. All in Good Fun This annual report is a parody and not a USA TODAY newspaper. The USA TODAY logo is a reg- istered trademark of Gannett Satellite Informa- tion Network LLC, which has no relationship with Cognex and has no connection with this annual report parody and has not expressly authorized the use of its marks. The SAP, eBay, Jumble, MAD, and Google marks are third-party marks used by Cognex for purposes of this parody. The owners of these marks are not associated with Cognex or this parody and have not expressly authorized the use of their marks. Transfer Agent Computershare www.computershare.com/investor Outside Legal Counsel Goodwin Procter LLP Boston, Massachusetts Independent Auditors Grant Thornton LLP Boston, Massachusetts COGWEAR* COLLECTION Cognex Corporation | A6 ogies to market, and introduce those technologies into their product lines. The compa- ny’s achievements in logistics during 2018 show how effec- tive this approach can be. With a desire to become a much larger company, Cognex’s goal is to grow revenue by 20% compounded annually over the long term. Underpinning their success will be the com- pany’s unique corporate cul- ture, core values, and entrepre- neurial spirit. Growth Spurt In 2018, Cognex revised up- ward the estimated size of its target market by 20% to $3.5 billion. This increase reflects growth in the underlying mar- ket and new applications being addressed by Cognex products since their previous estimate was published in 2016. Importantly, Cognex calcu- lates its own market estimate because there is no reliable third-party data available. They use historical information and take a narrow, conservative view of the applications that can be addressed today by Cognex products. Their mar- ket estimate also excludes po- tential opportunities that may develop over time, as well as those segments the company chooses not to target. A Bright Tomorrow Overall, Cognex believes that their target market can grow by high single digits in the com- ing years. Cognex intends to continue to outperform mar- ket growth because of superior technology and the strength of customer relationships. Furthermore, they plan to gain share and expand appli- cations in their current market and enter market adjacencies they believe offer high growth potential and high-margin opportunities for Cognex ma- chine vision. Wear what the Cognoids wear.Get yours today!* Available sizes: “Tight,” “Extra Tight,” and “Oh My Heavens, Did You See That?”