Details of the Quarter

Statement of Operations Highlights - Fourth Quarter of 2005

· Revenue for the fourth quarter of 2005 increased a dramatic 39% over the fourth quarter of 2004 due to the following factors:
· Record revenue from the Factory Automation market (including incremental revenue of approximately $6,200,000 from the DVT acquisition),
· Increased revenue from customers in the Semiconductor and Electronics Capital Equipment business, and
· Higher sales of SmartView®, the company’s surface inspection product. 

On a sequential basis, revenue increased 4% over the prior quarter due to higher revenue from the Factory Automation and Semi/Electronics Capital Equipment markets.

· Gross margin was 72% in the fourth quarter of 2005 compared to 73% in both the fourth quarter of 2004 and in the prior quarter.  Cost of revenue for the fourth quarter of 2005, the fourth quarter of 2004, and the third quarter of 2005 includes a benefit of $287,000, $317,000, and $185,000, respectively, relating to the sale of inventory previously reserved.  Excluding this benefit, gross margin would have been 71% in the fourth quarter of 2005, 72% in the fourth quarter of 2004, and 73% in the prior quarter.  Gross margin declined year-on-year despite higher sales volume due to revenue mix as well as favorable variances in the fourth quarter of 2004 that didn’t repeat in the current quarter.  On a sequential basis, the gross margin declined due to revenue mix and higher manufacturing costs.  During the fourth quarter of 2005, Cognex began moving a portion of its manufacturing operation from Massachusetts to Ireland to be closer to its contract manufacturer.

· Research, Development & Engineering (R, D & E) spending in the fourth quarter of 2005 decreased 1% from the fourth quarter of 2004 and 4% from the prior quarter.  Spending decreased year-on-year (despite incremental costs associated with the new employees added from the DVT acquisition) due to lower outside service costs.  The decline on a sequential basis is due to lower employee-related costs, including relocation expenses, as compared to the prior quarter. 
 
· Selling, General & Administrative (S, G & A) spending in the fourth quarter of 2005 increased 18% from the fourth quarter of 2004 and 3% on a sequential basis (or 23% and 8%, respectively, excluding the $1,000,000 Lemelson reserve reversal).  The increase year-on-year is due to incremental DVT costs, the company’s investment in sales and marketing, and higher professional fees.  On a sequential basis, the increase is due to higher employee-related expenses and sales costs, including commissions and travel and entertainment. 

· The company reported a foreign currency loss of $286,000 in the fourth quarter of 2005, a gain of $1,568,000 in the fourth quarter of 2004 and a loss of $410,000 in the prior quarter.  The company recognizes foreign currency gains and losses on the revaluation and settlement of accounts receivable and payable balances that are reported in one currency and collected or paid in another.

· Investment and other income was $1,531,000 in the fourth quarter of 2005 compared to $1,322,000 in the fourth quarter of 2004 and $1,156,000 in the prior quarter.  The increase in investment and other income, both year-on-year and sequentially, is due to higher yields. 

· The effective tax rate was 26% in the third and fourth quarters of 2005 as compared to 29% in the fourth quarter of 2004.  The effective tax rate decreased year-on-year due to more of the company’s profits being earned and taxed in lower tax jurisdictions in 2005 than in 2004. 

Balance Sheet Highlights – December 31, 2005

· Cognex’s financial position at December 31, 2005 was very strong, with over $312,000,000 in cash and investments, and no debt.  Cash and investments decreased by nearly $79,000,000 from the end of 2004, primarily due to the following uses:
· $115 million to purchase DVT, 
· $15 million paid out to shareholders as dividends, and
· $11.7 million to repurchase approximately 384,000 shares of common stock on the open market.
Notwithstanding those non-operating uses, Cognex generated positive cash flow from operations in 2005 of over $41,000,000.

· Days sales outstanding (DSO) for the fourth quarter of 2005 was 62 days, and remains within the company’s targeted range.

· Inventories at December 31, 2005 decreased by approximately $1,300,000, or 6%, from the end of 2004 despite incremental inventory from the DVT acquisition, and inventory turns in the fourth quarter were equivalent to 3.7 times per year. 

Business Trends and Financial Outlook

Bookings and Backlog:
· For the fourth quarter of 2005, bookings increased slightly over the prior quarter due to higher orders from the Semiconductor and Electronics Capital Equipment market and the Factory Automation market, which set a new record.  The increase in orders from those markets offset the expected decline in surface inspection orders given the unsustainably high order rate in the first nine months of the year.  Consolidated backlog at year end was approximately $33,000,000, which is an increase of 14% over the 2004 year-end backlog of approximately $29,000,000. 

Financial Outlook:
· For the first quarter of 2006, Cognex expects revenue to be between $60 million and $63 million.  At that revenue level, gross margin is expected to be in the low-70% range, including estimated pre-tax stock-based compensation expense of $300,000.  For the first quarter, operating expenses (R, D & E and S, G & A), including estimated pre-tax stock-based compensation expense of $2,600,000, are expected to increase by 15% to 20% on a sequential basis.  The effective tax rate is expected to be 26%.  As a result of the above, earnings are expected to be between $0.16 and $0.20 per diluted share (or between $0.20 and $0.24 per diluted share excluding estimated stock-based compensation expenses of $2,900,000).

 
Non-GAAP Financial Measures

This press release contains non-GAAP financial measures which Cognex believes are helpful in allowing individuals to more accurately assess its operations and more readily compare its results over multiple periods.  However, the non-GAAP financial measures are not meant to be considered in isolation, nor as a substitute for financial information provided in accordance with GAAP.

Analyst Conference Call and Simultaneous Webcast

Cognex will host a conference call to discuss its results for the fourth quarter of 2005, as well as its financial outlook, today at 5:00 p.m. eastern time.  The telephone number for the live call is 800-770-5589 (or 973-935-2039 if outside the United States). A replay will begin tonight at approximately 7:00 p.m. eastern time and will run continuously for 72 hours.  The telephone number for the replay is 877-519-4471 (or 973-341-3080 if outside the United States) and the access code is 6871747.   

Internet users can listen to a real-time audio broadcast of the conference call, as well as an archive replay of the call, on Cognex’s website at http://www.cognex.com/investor/default.asp
 
About Cognex Corporation

Cognex Corporation designs, develops, manufactures, and markets machine vision systems, or computers that can "see." Cognex is the world's leader in the machine vision industry, having shipped more than 300,000 machine vision systems, representing over $1.9 billion in cumulative revenue, since the company's founding in 1981. Cognex's Modular Vision Systems Division, headquartered in Natick, Massachusetts, specializes in machine vision systems that are used for automating the manufacture of a wide range of discrete items and for assuring their quality. Cognex's Surface Inspection Systems Division, headquartered in Alameda, California, specializes in machine vision systems that are used for inspecting the surfaces of products manufactured in a continuous fashion, such as metals, papers and plastics. In addition to its corporate headquarters in Natick, Massachusetts, Cognex has regional offices and distributors located throughout North America, Japan, Europe, Southeast Asia, and Latin America. Visit Cognex on-line at http://www.cognex.net.

Forward-Looking Statement

Certain statements made in this press release and its attachments, which do not relate solely to historical matters, are forward-looking statements.  You can identify these forward-looking statements by use of the words “expects,” “anticipates,” ”estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall” and similar words.  These forward-looking statements, which include statements regarding business trends and the company’s financial outlook, involve risks and uncertainties that could cause actual results to differ materially from those projected.  Such risks and uncertainties include: (1) global economic conditions that impact the capital spending trends of manufacturers in a variety of industries; (2) the cyclicality of the semiconductor and electronics industries; (3) the inability to achieve significant international revenue; (4) fluctuations in foreign exchange rates; (5) the loss of, or significant curtailment of purchases by, any one or more principal customers; (6) the reliance upon certain sole source suppliers to manufacture and deliver critical components for the company’s products; (7) challenges in integrating acquisitions and achieving anticipated benefits; and (8) the other risks detailed in the company’s reports filed with the SEC, including the company’s Form 10-K for the fiscal year ended December 31, 2004.  You should not place undue reliance upon any such forward-looking statements, which speak only as of the date made.  The company disclaims any obligation to update forward-looking statements after the date of such statements.