Cognex Corporation

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Cognex Corporation

One Vision Drive
Natick, Massachusetts 01760-2059
U.S.A.
Telephone: (508) 650-3000
Fax: (508) 650-3333
Web Site: http://www.cognex.com

Public Company
Incorporated: 1981
Employees: 746
Sales: $202 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CGNX
NAIC: 334513 Instruments and Related Product Manufacturing for Measuring, Displaying, and Controlling Industrial Process Variables; 334111 Electronic Computer Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing

Based in Natick, Massachusetts, Cognex Corporation is a leading global supplier of machine vision systems, which give computers the power of sight. In addition to its East Coast headquarters and other U.S. locations, Cognex's operational base includes sites in Europe, Japan, and Southeast Asia. Cognex's clients hail from a number of industries, including aerospace, automotive, consumer products, healthcare, packaging, pharmaceuticals, and semiconductor manufacturing. The company offers a comprehensive lineup of industrial-grade machine vision products, including vision sensors, PC vision systems, hand-held and fixed-mount code readers, and surface inspection systems. As of late 2005, semiconductors accounted for 27 percent of Cognex's business, followed by factory automation (57 percent), and surface inspection (16 percent). Outside of its initial success in the semiconductor and electronics OEM business, Cognex considers its foray into general factory automation as one of the most important events in its history.

Cognex's products are used to automate different aspects of the manufacturing process. As the company explains, its systems "automatically identify products, inspect for defects, gauge part dimensions, and guide robotic equipment—at up to thousands of parts per minute…. In a typical application, a Cognex machine vision system captures an image of the part to be inspected through a video camera. The system then analyzes the image and generates an answer about it, such as whether a part is defective. This information then can be sent to other equipment in the manufacturing line, including a robotic arm that will remove a bad part from the process."

Pioneering Machine Vision: The 1980s

Cognex, which draws its name from the phrase "Cognition Experts," was established by Dr. Robert J. Shillman, a lecturer in human visual perception at the Massachusetts Institute of Technology (MIT). Prior to receiving his doctorate from MIT, Dr. Shillman earned undergraduate and graduate degrees in electrical engineering from Northeastern University and taught computer science at Tufts University.

According to the April 1999 issue of Electronic Business, Shillman was "deeply dissatisfied" with life in the academic world. Psychotherapy revealed that he wanted to be two things: an entrepreneur and an entertainer. Using research from his dissertation at MIT, in 1981 Shillman invested $87,000—his life savings, which he earned by restoring classic cars and fixing up apartment buildings—to start Cognex in a 1,000-square-foot office.

Over the years, Shillman has built a culture that prizes humor and allows him to entertain others. When asked about his emphasis on humor, he once explained that it is an effective way of increasing morale, addressing rumors, and breaking down barriers between workers, whom he affectionately calls "Cognoids." In addition to instituting a policy that made Halloween Cognex's official holiday—and required all employees to work in costume—Shillman became known for wearing wild costumes throughout the year and engaging in complicated practical jokes. A Fortune article noted that Shillman once gave out cash bonuses of up to $10,000—in moneybags from a Brink's truck. He awards 15-year employees with trips to one of the world's seven wonders, and engages in a Three Stooges routine to welcome new hires. Cognex's 2002 annual report was a Mad Magazine parody, with Shillman appearing on the cover as Alfred E. Neuman. The company even has its own corporate anthem, which Shillman leads with the backing of an employee rock band.

Shillman launched Cognex with the help of Bill Silver and Marilyn Matz, two graduate students from MIT's Artificial Intelligence Lab, luring them to summer jobs with free bicycles and the prospect of interesting work. Silver and Matz remained with Cognex long-term, earning pioneer status along with Shillman. Matz eventually became senior vice-president of engineering for Cognex's Modular Systems Division, and Silver became senior vice-president of research and development and chief technology officer.

In the February 2, 2004 issue of Electronic Design, Silver explained that youthful idealism and risk-taking were key elements in the company's early success, remarking: "We saw a problem people wanted solved, and we were crazy enough to do it. We had our share of good luck too. Had we known how hard it would be, who knows if we would have given it a try?"

Cognex initially set its sights on developing custom machine vision systems and installing them for clients. The company quickly made its mark by releasing an industrial optical character recognition (OCR) system called DataMan in 1982. According to Cognex, DataMan was an industry first and had "the capability to read, verify, and assure the quality of letters, numbers, and symbols in industrial environments." The new system was first used by a typewriter manufacturer to ensure correct key placement. After securing its first customer, the company's growth was aided by capital investments of more than $5 million.

According to the company, when DataMan successfully read its first character, employees celebrated with champagne. So began a tradition of celebrating important milestones with a bottle of the sparkling beverage. After employees autographed the label, these special bottles were added to Cognex's "Wall of Fame." Following the introduction of DataMan, Cognex introduced its Checkpoint 5500 Automatic Visual Tester in 1984, which was used for detecting assembly errors on circuit boards.

After helping to form the machine vision industry, Cognex soon found itself in an increasingly competitive environment, with roughly 100 players vying for a share of the market. Developing custom machine vision systems was a costly proposition. In addition to significant operating losses, Cognex ran into technical difficulties with some of its early installations. For example, a system developed for American Cyanamid performed correctly in the company's lab, but had problems on the shop floor in Puerto Rico. Cognex was forced to take a loss on the project and refund American Cyanamid's money.

For reasons such as these, the company shifted gears in 1986. Allan Wallack, a manager from Digital Equipment Corp., was hired as Cognex's chief operating officer. Wallack helped to change the company's focus from custom systems to the development of standardized machine vision hardware and software for the original equipment manufacturer (OEM) market. Cognex reasoned that technically adept OEMs—especially those in industries like semiconductors, which rely heavily on machine vision technology—could then tailor these standardized products to meet their specific needs.

In tandem with its new approach, Cognex unveiled two new products. The first was Cognex 2000, which the company described as "the world's first machine vision system built on a single printed circuit board." The second was a software application called Search, which had the capability to "locate patterns in images very quickly and accurately."

By the mid-1980s, Cognex was quickly establishing a position of industry leadership. Leading firms provided development funds to Cognex for the development of much needed technology. For example, General Motors' Delco Electronics division gave Cognex $500,000 to develop a system for inspecting circuit boards with surface mounted devices (SMDs).

Cognex turned its first profit in 1987. The following year, the company's revenues totaled $10.6 million and net income reached $2.4 million. At this time, approximately 33 percent of total sales came from OEMs in the $600 million semiconductor industry. This focus required Cognex to do a growing amount of business with Japanese firms, which held attributes like quality and punctuality in high regard.

Initially, Cognex worked with Japanese firms through a distributor named Marubeni Hytech Ltd. Dr. Shillman eventually began traveling to Japan, however, to forge direct relationships and learn more about Japanese business practices. His efforts were met with success. As the November 13, 1989 issue of Electronic Business explained, quality improvements at Cognex resulted in tighter delivery schedules and shorter response times, and helped the company to secure significant business from the Japanese.

In late 1988 Tokyo-based Seimitsu Co. Ltd. agreed to purchase Cognex's machine vision systems at a rate of about 50 per year. This was followed by a $9 million agreement with Shinkawa Ltd. in the spring of 1989, which some observers considered the largest contract in the machine vision industry's history. The company expected that the percentage of its sales attributable to Japanese companies would increase from 14 percent in 1988 to more than 20 percent in 1989.

Company Perspectives:

I started Cognex because I wanted to work each day in a particular type of company—one that had smart, energetic people who enjoyed what they were doing, who liked to have goals and to accomplish those goals. And I wanted a physical environment that reflected the culture of the company, which I wanted to be dynamic. I also wanted to work for a company where the management would tolerate, or better yet, seek out outspoken and assertive people like myself who don't care about office politics but who care deeply about doing the right thing for customers. Well, I couldn't find such a company, so I had to create it.—Cognex Founder Dr. Robert J. Shillman, Electronic Design, February 2, 2004

Cognex ended the 1980s on solid footing. The company went public in 1989 at $1.38 per share. Sales reached $15.9 million that year, with net income of $3.7 million.

Focused Growth: The 1990s

The 1990s began on a high note. Cognex saw its stock price triple only a year after its initial public offering. In the March 5, 1990 issue of Metalworking News, Fechtor, Detwiler & Co. analyst M. Ronald Opel forecast that Cognex would see its net income grow at an annual rate of 25 to 35 percent during the first years of the decade. At 25 percent, Opel explained that the company held a commanding share of the U.S. merchant electronics manufacturing machine vision market (not including companies that manufactured their own systems), and that Cognex was "the only machine vision company thus far to have achieved substantial profitability."

Another positive development occurred in 1990 when Dr. Shillman was named Entrepreneur of the Year by Inc. magazine. With Cognex in good condition, COO Allan Wallack left the company to pursue other opportunities. He was replaced by Neil R. Bonke, who previously served as president of General Signal Corp.'s Xynetics division. At this time, the company's products ranged from the Cognex 1500 system to higher-end applications such as its 2000 and 3000 series. Starting at $20,000, Cognex's systems required engineers to be knowledgeable in the C programming language.

Cognex ended 1990 with sales of $23.5 million. That year, the company's net income surged 76 percent, reaching $6.5 million. Milestones at Cognex during the early 1990s included a patent for VC-1, a dedicated vision chip, in 1991. That same year, the company unveiled the Cognex 4000, a full-capability machine vision system for VME bus computers. In 1993 the Cognex 5000 marked the first advanced vision system for PC/AT bus personal computers. Finally, the company introduced its Windows-based Checkpoint system in 1994. Priced at $23,900, the point-and-click machine vision system could be implemented on assembly lines by nontechnical employees.

Heading into the second half of the 1990s, Cognex began to actively acquire other businesses. In 1995 the company acquired Portland, Oregon-based Acumen Inc., a wafer identification technology firm. This was followed by the purchase of Alameda, California-based Isys Controls, a manufacturer of high-performance surface inspection systems, in 1996. Cognex acquired Mayan Automation, a manufacturer of low-cost surface inspection systems, in 1997, followed by the machine vision business of Allen-Bradley Inc., a division of Rockwell Automation, in 1998.

A number of important product rollouts occurred at Cognex during the mid-1990s. In 1996 the company introduced the acuReader/2Dm, a PC plug-in Data Matrix 2D code reading solution. The following year Cognex unveiled PatMax, a fast, highly accurate, high-yield object location technology. Finally, a high-speed, compact industrial machine vision camera called the CVC-1000 was introduced in 1998.

The Cognex Surface Inspection Systems Division was formed in late 1997. Based in Alameda, California, it was established to develop and market high-speed, camera-based inspection systems to end-users in the plastics, metals, paper, and nonwoven materials sectors. The company ended 1999 with revenue of $152.1 million and net income of $30.4 million.

Acquisition and Expansion: 2000–05

The new millennium brought new developments at Cognex. In May 2000, the company bought Komatsu Ltd.'s (Japan) machine vision business for $11 million, with additional performance-dependent payments of up to $8 million. During the same month, the company purchased Epsom, U.K.-based Image Industries, a manufacturer of vision sensors. The purchase made Cognex a leading supplier in the United Kingdom. In 2000, the company also acquired the surface inspection business of Kuoppio, Finland-based Honeywell International.

New products during 2000 included the acuReader III, Checkpoint II, and SMD4 machine vision systems, as well as the SmartView web inspection system and the In-Sight 2000 machine vision sensor. According to Cognex, its In-Sight line helped it to expand into the realm of factory automation. In 2001 the company introduced the In-Sight 1000 and In-Sight 3000 industrial machine vision sensors. Equipped with Ethernet ports, the sensors were suited for a range of industrial applications.

Key Dates:

1981:: MIT professor Dr. Robert J. Shillman invests $87,000 to start Cognex.
1982:: The company releases an industrial optical character recognition (OCR) system called DataMan.
1986:: Cognex begins focusing on the development of standardized machine vision hardware and software for the original equipment manufacturer market.
1987:: The company turns its first profit.
1989:: Cognex goes public.
1990:: Dr. Robert Shillman is named Entrepreneur of the Year by Inc. magazine.
1994:: Cognex introduces its Windows-based Checkpoint system, which can be implemented by nontechnical employees.
1995:: Cognex acquires Portland, Oregon-based Acumen Inc., a wafer identification technology firm.
1996:: Cognex purchases Alameda, California-based Isys Controls, a manufacturer of high-performance surface inspection systems.
2000:: Cognex buys Komatsu Ltd.'s machine vision business, Epsom, U.K.-based Image Industries, and the surface inspection business of Kuoppio, Finland-based Honeywell International.
2001:: Amidst an industry downturn, Cognex announces its first major layoff since 1985.
2004:: Jim Hoffmaster is named company president, becoming the first employee other than Dr. Shillman to hold the title.
2005:: Cognex acquires Duluth, Georgia-based DVT Corporation for approximately $115 million.
2006:: Cognex celebrates its 25th anniversary.

Jim Hoffmaster became Cognex's chief operating officer in 2001, a difficult year in the company's history. As overall economic conditions soured in late 2001, exacerbated by the terrorist attacks of September 11, the electronics and semiconductor segments began to decline. This prompted Cognex to announce its first major layoff since 1985. In addition to cutting 25 unfilled positions and contractor jobs, the company let 60 regular employees go. The workforce reduction, which was expected to save the company $6.5 million, affected Cognex's Modular Vision Systems Division and included 30 positions at the company's headquarters. Despite the workforce reduction, the industry downturn still impacted Cognex; in 2002 the company lost $6 million on revenues of $114 million.

Cognex made two additional acquisitions in 2003. That year, the company purchased the wafer identification business of Siemens Dematic AG, as well as the ID code reading business of Aachen, Germany-based Gavitec AG. By 2003 Cognex served the Asian market from offices in Japan, Korea, Singapore, and Taiwan, and through partnerships with Chinese firms. In August of that year, the company announced plans to open an office in Shanghai to directly serve the burgeoning Chinese market. Cognex marked the year's end by reaching a significant milestone: the sale of its 200,000th machine vision system, marking $1.5 billion in cumulative revenue since 1981.

Cognex's revenues reached $202 million in 2004. That year, Jim Hoffmaster was named company president, becoming the first employee other than Dr. Shillman to hold the title. Shillman remained chairman and CEO. Cognex's total number of system shipments exceeded 275,000 in 2004, representing cumulative revenue of more than $1.9 billion since 1981. With 207 patents and more than 100 additional patents pending, Cognex had devoted more than 500 "man-years" to the development of its vision systems. At this time, the company employed nearly 700 workers, affectionately known as "Cognoids," some 200 of whom worked outside of North America.

In late 2004 Cognex formed two new teams in its Modular Vision Systems Division with a goal of devoting resources to new markets for machine vision technology, namely early vision technology adopters with strong growth potential. One new team was focused on expert sensors, which included sensors for monitoring admission to restricted areas, while another concentrated on identification products. The latter area involved technology for reading two-dimensional bar codes, which were being adopted by manufacturers in the automotive, electronics, aerospace, and defense sectors. Two-dimensional bar codes are capable of encoding more than 1,000 characters of data, and are useful for tracking and tracing parts.

In May 2005 Cognex announced that it had acquired one of its main rivals, Duluth, Georgia-based DVT Corporation, for approximately $115 million. The acquisition gave Cognex access to a network of more than 150 industrial distributors world-wide who were trained to support and sell machine vision products. In particular, the distribution network would help Cognex to expand its market for low-cost vision sensors.

As Cognex prepared to mark its 25th anniversary in 2006, the future appeared to hold nearly limitless potential. As Bill Silver explained in the February 2, 2004 issue of Electronic Design: "We have hardly begun to scratch the surface of machine-vision applications and technology. We have examples in the world of human vision that are so far in advance of anything we can make with machines, that I don't expect us to catch up in my lifetime or my children's."

Principal Subsidiaries

Cognex Finland Oy; Cognex International Inc. (France); Cognex Germany Inc.; Cognex Ltd. (Ireland); Cognex Benelux (Netherlands); Cognex UK Ltd.; Cognex KK (Japan).